The Australian Corporate Governance Transparency Index: Findings and trends

  • Comparing multiple aspects of organisations' publicly available corporate governance information is a manual and time-consuming process.
  • A new disclosure tool applies 28 individual disclosure aspects to each company equally weighted across the areas of Policy, Board, Remuneration and Sustainability.
  • Current findings indicate a gap in governance disclosure of environmental and social impact information.

Satisfying the evolving environmental, social and governance disclosure expectations of company shareholders is a critical stakeholder management exercise. Where corporate governance transparency is insufficient, investors and broader market participants generally adopt the downside view and act accordingly. As the 2020 annual general meeting season approaches, a perceived absence of governance reporting transparency can result in shareholder voting dissent and in rare instances, disruptive activist campaigning. 

If a company is seeking to compare multiple aspects of its publicly available corporate governance information, the exercise of conducting a peer disclosure review is a manual and time-consuming process. To address this challenge we developed the Australian Corporate Governance Transparency Index (ACGTI), an objective governance disclosure tool that applies 28 individual disclosure aspects to each company within the S&P/ASX 300 index and equally weighted across the areas of Policy, Board, Remuneration and Sustainability.

As an objective index, the focus of the ACGTI is on corporate governance transparency by comparing the presence (not quality), and thereby ranking, specific governance information that is relevant to institutional shareholder decision-making. Aspects that are applied to the ACGTI methodology substantially link to the ASX Corporate Council’s Corporate Governance Principles and Recommendations (4th edition) and the Australian Council of Superannuation Investors Governance Guidelines (2019) — both of which are  non-binding but nevertheless informed by the requirements of shareholders, amongst other considerations.

ACGTI query topics

Policy

  • Diversity
  • Risk management
  • Culture
  • Social licence
  • Related parties
  • Whistleblowing
  • Workforce

Board

  • Renewal
  • Alignment
  • Evaluations
  • Responsiveness
  • Annual general meeting
  • Board skills matrix
  • Board skills matrix+

Remuneration

  • Framework assessment
  • Strategic alignment
  • Reporting
  • Benchmarking
  • Pay for performance
  • Provisions
  • Shareholder alignment

Environmental & social (sustainability)

  • Materiality
  • Impact
  • Management
  • Metrics and measurement
  • Climate change
  • Modern slavery
  • Health & safety

*Free access to the ACGTI, including the detailed underlying queries, is available to Company Secretaries and Non-Executive Directors of ASX companies. Visit www.sovereigngovernance.com.au to register.

Each category includes seven individual queries, whereby each satisfied query receives a score of 1. The maximum ACGTI company score is therefore 28. Companies excluded from the ACGTI include those that do not support comparability in governance disclosure practice, for example ASX listed entities domiciled in a country outside of Australia, or externally managed investment trusts. 

The median ACGTI company score for the S&P/ASX 300 index is currently 13, or 46 per cent. When broken across the four governance topics, the median ACGTI score for Policy, Board, Remuneration and Sustainability are 4, 3, 3 and 2 (out of a maximum topic score of 7), respectively. This indicates that there is a gap in governance disclosure that is broadly weighted towards an absence of environmental and social impact information, in addition to instances where board and remuneration disclosure are also wanting.  

ACGTI score and market capitalisation: S&P/ASX 300

 

Source: Sovereign Governance Advisory

When reviewing ACGTI scores in aggregate it is clear there is some correlation between size and complexity of the business (as indicated by market capitalisation) and ACGTI ranking. Indeed, companies with a total score of 25 or higher (out of 28) include: Commonwealth Bank of Australia, BHP Group, Suncorp Group, South32 Limited, Woolworth’s Group Limited, Newcrest Mining and AGL Energy. Moreover, the median ACGTI score amongst the top 50 ASX listed companies is 22 or 79 per cent.

     Advertisement

Conversely those companies that scored poorly are largely contained to the bottom half of the S&P/ASX 300 index. There are 29 companies that currently score in the bottom quartile (a total ACGTI score of 7 or less), of which only one company sits within the S&P/ASX 100 index (TPG Telecom). Interestingly, 82 per cent of those companies that rank below the median ACGTI score (13) for the S&P/ASX 300 index sit within the S&P/ASX 200-300 market capitalisation range.

In addition, the relatively poor ACGTI scoring for sustainability aspects is further exacerbated at the bottom end of the S&P/ASX 300 index. A median score of 1 is observed under the Sustainability topic for companies within the S&P/ASX 200-300 market capitalisation range, and a total number of 45 companies within this range score 0 for Sustainability disclosure information.

Median ACGTI score by sector (out of 28): S&P/ASX 300

Source: Sovereign Governance Advisory

When observing sector trends in corporate governance disclosure transparency both the Real Estate and Energy sectors rank as clear leaders, and Information Technology companies generally score the poorest in aggregate. Broadly speaking, both the Real Estate and Energy sectors disclose considerable detail around their environmental and social impacts and related risk management practices. The median Sustainability topic scores for Real Estate and Energy are currently 5 and 6 (out of a maximum topic score of 7), respectively. By comparison, the median Sustainability topic score for Information Technology companies is 1, whilst 8 out of the 23 Information Technology companies ranked under the ACGTI score 0 for governance transparency under the Sustainability topic.

When reviewing sector trends in context of the Remuneration topic, it is interesting to see Financials also ranking highly alongside Real Estate and Energy companies in respect of governance transparency. 

Median ACGTI score by sector by topic (out of 7): S&P/ASX 300

 

Source: Sovereign Governance Advisory

Upon its initial launch the ACGTI has identified several interesting trends:

  • There is a clear correlation between company size and corporate governance reporting detail that is required to satisfy the asset allocation and voting decisions of institutional investors and governance advisors (such as proxy advisory groups). Substantial governance transparency gaps are aggregated towards the bottom half of the S&P/ASX 300 index.
  • Substantial progress is required in advancing governance reporting transparency around environmental and social (Sustainability) impacts. There appear to be specific sectors that are lagging in disclosing sufficient sustainability-related information (for example — Information Technology, Consumer Discretionary). There is also poor Sustainability transparency concentrated within the S&P/ASX 200-300 market capitalisation range.
  • There is relatively enhanced transparency around Remuneration considerations for Financials, Energy and Real Estate companies when compared against other sectors.

Michael Chandler can be contacted by email at mchandler@sovereigngovernance.com.au.

Material published in Governance Directions is copyright and may not be reproduced without permission. The views expressed therein are those of the author and not of Governance Institute of Australia. All views and opinions are provided as general commentary only and should not be relied upon in place of specific accounting, legal or other professional advice.