Students will work in Groups of 3 as assigned to the specific paper in a topic. My paper is Examining distinct carbon cost structures and climate change abatement strategies in CO2 polluting firms. Us

Students will work in Groups of 3 as assigned to the specific paper in a topic. My paper is Examining distinct carbon cost structures and climate change abatement strategies in CO2 polluting firms. Us
Corporate Governance Principles and Recommendations 4th Edition February 2019 ASX Corporate Governance Council Lay solid foundations for management and oversight: A listed entity should clearly delineate the respective roles and responsibilities of its board and management and regularly review their performance. Structure the board to be effective and add value: The board of a listed entity should be of an appropriate size and collectively have the skills, commitment and knowledge of the entity and the industry in which it operates, to enable it to discharge its duties effectively and to add value. Instil a culture of acting lawfully, ethically and responsibly: A listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and responsibly. Safeguard the integrity of corporate reports: A listed entity should have appropriate processes to verify the integrity of its corporate reports. Make timely and balanced disclosure: A listed entity should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities. Respect the rights of security holders: A listed entity should provide its security holders with appropriate information and facilities to allow them to exercise their rights as security holders effectively. Recognise and manage risk: A listed entity should establish a sound risk management framework and periodically review the effectiveness of that framework. Remunerate fairly and responsibly: A listed entity should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract, retain and motivate high quality senior executives and to align their interests with the creation of value for security holders and with the entity’s values and risk appetite. The 8 Principles 1 2 3 4 5 6 7 8 Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 About the Council . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 What is “corporate governance”? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The purpose of the Principles and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The basis of the Principles and Recommendations – the “if not, why not” approach . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The application of the Principles and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The structure of the Principles and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The linkage with ASX’s listing rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Where to make corporate governance disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 How to approach corporate governance disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Disclosing the fact that a recommendation is followed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Disclosing the reasons for not following a recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Effective date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Principle 1 / Lay solid foundations for management and oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Principle 2 / Structure the board to be effective and add value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Principle 3 / Instil a culture of acting lawfully, ethically and responsibly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Principle 4 / Safeguard the integrity of corporate reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Principle 5 / Make timely and balanced disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Principle 6 / Respect the rights of security holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Principle 7 / Recognise and manage risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Principle 8 / Remunerate fairly and responsibly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Additional recommendations that apply only in certain cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 The application of the recommendations to externally managed listed entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 1 / Corporate Governance Principles and Recommendations 4th Edition 2019 About the Council The Council was convened in August 2002. It brings together various business, shareholder and industry groups, each offering valuable insights and expertise on governance issues from the perspective of their particular stakeholders. Its primary work has been the development of the Principles and Recommendations. The members of the Council are: • Association of Superannuation Funds of Australia Limited • ASX Limited • Australasian Investor Relations Association • Australian Council of Superannuation Investors • Australian Institute of Company Directors • Australian Institute of Superannuation Trustees • Australian Shareholders’ Association • Business Council of Australia • Chartered Accountants Australia and New Zealand • CPA Australia Ltd • Financial Services Council • Financial Services Institute of Australasia • Governance Institute of Australia • Group of 100 • Institute of Internal Auditors – Australia • Institute of Public Accountants • Law Council of Australia • Property Council of Australia • Stockbrokers and Financial Advisers Association Limited Further information about the Council, including a copy of its charter, is available at: www.asx.com.au/regulation/ corporate-governance-council.htm 1 Justice Owen in the HIH Royal Commission, The Failure of HIH Insurance Volume 1: A Corporate Collapse and Its Lessons, Commonwealth of Australia, April 2003 at page xxxiv. What is “corporate governance”? The phrase “corporate governance” describes “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled within corporations. It encompasses the mechanisms by which companies, and those in control, are held to account.” 1 Good corporate governance promotes investor confidence, which is crucial to the ability of entities listed on the ASX to compete for capital. The purpose of the Principles and Recommendations These Principles and Recommendations set out recommended corporate governance practices for entities listed on the ASX that, in the Council’s view, are likely to achieve good governance outcomes and meet the reasonable expectations of most investors in most situations. The Council recognises, however, that different entities may legitimately adopt different governance practices, based on a range of factors, including their size, complexity, history and corporate culture. For that reason, the Principles and Recommendations are not mandatory and do not seek to prescribe the corporate governance practices that a listed entity must adopt. Foreword The Corporate Governance Principles and Recommendations (“Principles and Recommendations”) were first introduced in 2003. A second edition was published in 2007 and a third in 2014. In 2017, the ASX Corporate Governance Council (“Council”) agreed that it was an appropriate time to commence work on a fourth edition of the Principles and Recommendations to address emerging issues around culture, values and trust, fuelled by recent examples of conduct by some listed entities falling short of community standards and expectations. The fourth edition comes into force for financial years commencing on or after 1 January 2020. I would like to express my appreciation to the Council for its work in maintaining the Principles and Recommendations as a world-leading standard on corporate governance by listed entities. Elizabeth Johnstone, Chair, ASX Corporate Governance Council ASX Corporate Governance Council / 2 Lay solid foundations for management and oversight: A listed entity should clearly delineate the respective roles and responsibilities of its board and management and regularly review their performance. Structure the board to be effective and add value: The board of a listed entity should be of an appropriate size and collectively have the skills, commitment and knowledge of the entity and the industry in which it operates, to enable it to discharge its duties effectively and to add value. Instil a culture of acting lawfully, ethically and responsibly: A listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and responsibly. Safeguard the integrity of corporate reports: A listed entity should have appropriate processes to verify the integrity of its corporate reports. Make timely and balanced disclosure: A listed entity should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities. Respect the rights of security holders: A listed entity should provide its security holders with appropriate information and facilities to allow them to exercise their rights as security holders effectively. Recognise and manage risk: A listed entity should establish a sound risk management framework and periodically review the effectiveness of that framework. Remunerate fairly and responsibly: A listed entity should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract, retain and motivate high quality senior executives and to align their interests with the creation of value for security holders and with the entity’s values and risk appetite. 1 2 3 4 5 6 7 8 The basis of the Principles and Recommendations – the “if not, why not ” approach Which governance practices a listed entity chooses to adopt is fundamentally a matter for its board of directors, the body charged with the legal responsibility for managing its business with due care and diligence 2 and therefore for ensuring that it has appropriate governance arrangements in place. Under the Principles and Recommendations, if the board of a listed entity considers that a Council recommendation is not appropriate to its particular circumstances, it is entitled not to adopt it. If it does so, however, it must explain why it has not adopted the recommendation – the “if not, why not” approach. This approach ensures that the market receives an appropriate level of information about the entity’s governance arrangements so that investors and other stakeholders can have a meaningful dialogue with the board and management on governance matters and can factor the information provided into their decision on whether or not to invest in the entity and how to vote on particular resolutions. The “if not, why not” approach is fundamental to the operation of the Principles and Recommendations. The application of the Principles and Recommendations The Principles and Recommendations apply to all entities admitted to the ASX official list as an ASX listing, 3 regardless of the legal form they take, 4 whether they are established in Australia or elsewhere, and whether they are internally or externally managed. The Principles and Recommendations are specifically directed at, and only intended to apply to, ASX listed entities. However, as they reflect a contemporary view of appropriate corporate governance standards, other bodies may find them helpful in formulating their governance rules or practices. 2 Sections 180 (in the case of a listed company) and 601FD(1)(b) (in the case of a listed trust) of the Corporations Act. 3 The Principles and Recommendations do not apply to entities admitted to the ASX official list as ASX debt listings or ASX foreign exempt listings. 4 That is, whether they are a listed company, listed trust or listed stapled entity. The structure of the Principles and Recommendations The Principles and Recommendations are structured around, and seek to promote, 8 central principles: 3 / Corporate Governance Principles and Recommendations 4th Edition 2019 There are 35 specific recommendations of general application intended to give effect to these principles, as well as 3 additional recommendations that only apply in certain limited cases. These additional recommendations are included in the third last section of this document, immediately after the section dealing with principle 8. There is also explanatory commentary with further guidance on the recommendations. Some recommendations require modification when applied to externally managed listed entities. The second last section of this document explains how externally managed listed entities should apply and make disclosures against the recommendations. The last section is a glossary which explains the meaning of a number of key terms, including “executive director”, “non-executive director”, “senior executive”, “substantial holder”, “environmental risk” and “social risk”. The linkage with ASX’s listing rules Each ASX listed entity is required under listing rule 4.10.3 to include in its annual report either a corporate governance statement 5 that meets the requirements of that rule, or the URL of the page on its website where such a statement is located. 6 The corporate governance statement must disclose the extent to which the entity has followed the recommendations set by the Council during the reporting period. If the entity has not followed a recommendation for any part of the reporting period, its corporate governance statement must separately identify that recommendation and the period during which it was not followed and state its reasons for not following the recommendation and what (if any) alternative governance practices it adopted in lieu of the recommendation during that period. By requiring listed entities to compare their corporate governance practices with the Council’s recommendations and, where they do not conform, to disclose that fact and the reasons why, listing rule 4.10.3 acts to encourage listed entities to adopt the governance practices suggested in the Council’s recommendations but does not force them to do so. It leaves a listed entity with the flexibility to adopt alternative governance practices, if its board considers those to be more suitable to its particular circumstances, subject to the requirement for the board to explain its reasons for adopting those alternative practices instead of the Council’s recommendations. 5 “Corporate governance statement” is defined in listing rule 19.12 to mean the statement referred to in listing rule 4.10.3 which discloses the extent to which an entity has followed the recommendations set by the ASX Corporate Governance Council during a particular reporting period. 6 Listing rule 4.7.4 provides that if an entity’s corporate governance statement is not included in its annual report, the entity must also give ASX a copy of its corporate governance statement at the same time as it gives its annual report to ASX. The corporate governance statement must be current as at the effective date specified in that statement for the purposes of listing rule 4.10.3. 7 Or, in the case of a trust, the board of the responsible entity of the trust. 8 Listing rule 4.7.3. 9 Listing rule 4.7.4. It is this rule which encapsulates the “if not, why not” requirement underpinning the operation of the Principles and Recommendations and which serves to ensure that the market receives an appropriate level of information about the governance practices an entity has adopted. An entity’s corporate governance statement must specify the date at which it is current, which must be the entity’s balance date or a later date specified by the entity and state that it has been approved by the board of the entity. 7 Each ASX listed entity must provide to ASX with its annual report a completed Appendix 4G, which has a key to where the various disclosures suggested in the recommendations or required under listing rule 4.10.3 can be found. 8 If an entity’s corporate governance statement is not included in its annual report, the entity must also give ASX a copy of its corporate governance statement at the same time as it gives its annual report to ASX. The corporate governance statement must be current as at the effective date specified in that statement for the purposes of listing rule 4.10.3. 9 Again, these requirements apply to all ASX listed entities regardless of the legal form they take, whether they are established in Australia or elsewhere, and whether they are internally or externally managed. The disclosures required under listing rule 4.10.3 and referenced in Appendix 4G relate specifically to the recommendations in the Principles and Recommendations. The principles themselves, and the commentary on the recommendations, do not form part of the recommendations and therefore do not trigger any specific disclosure obligations under listing rule 4.10.3. Where to make corporate governance disclosures Where these Principles and Recommendations refer to a listed entity disclosing information, it should be disclosed either in the entity’s annual report or on its website. The Council expects that many listed entities will streamline their annual report by choosing to publish their governance disclosures, including their corporate governance statement under listing rule 4.10.3, on their website rather than in their annual report. If they do so, those disclosures should be clearly presented and centrally located on, or accessible from, a “corporate governance” landing page on its website. ASX Corporate Governance Council / 4 There should be an intuitive and easily located link to this landing page in the navigation menu for the entity’s website (for example, under an “About Us”, “Investor Centre” or “Information for Shareholders/Unitholders” menu item). Where a listed entity chooses to include its corporate governance statement in its annual report rather than on its website, the Council recommends that the corporate governance statement and any related corporate governance disclosures appear in a clearly delineated “corporate governance” section of the annual report. It is acceptable for an entity’s corporate governance statement to incorporate material by reference (for example, on another part of the entity’s website or in another part of its annual report) provided that material is freely available and the statement clearly indicates where interested parties can read or obtain a copy of that material (for example, the URL of the relevant web page or the relevant page or section of the annual report). How to approach corporate governance disclosures The Council encourages listed entities to give an informative explanation of their corporate governance arrangements and not to take a pedantic or legalistic approach to their disclosures under listing rule 4.10.3, such as simply listing the recommendations followed and those not followed and why. In this regard, listed entities should view their corporate governance statement not as a compliance document but rather as an opportunity to demonstrate that their board and management are alive to the importance of having proper and effective corporate governance arrangements and to communicate to security holders and the broader investment community the robustness of their particular approach to corporate governance. This includes not only outlining the governance arrangements it has in place but also explaining how they are being implemented in practice. For example, where a recommendation calls for a particular policy to be in place, 10 it will aid transparency and promote investor confidence for the entity to disclose, where appropriate, 11 action taken to promote compliance and whether there have been material breaches of the policy during the reporting period and how they have been dealt with. Similarly, where a recommendation calls for a matter to be reviewed or evaluated, 12 investors will find it helpful for the entity to disclose, where appropriate, any material insights it has gained from the review or evaluation and any changes it has made to its governance arrangements as a result. 10 As is the case for example in recommendations 1.5 (diversity), 3.2 (code of conduct), 3.3 (whistleblower policy), 3.4 (anti-bribery and corruption policy), 5.1 (disclosure policy) and 8.3 (policy on hedging equity incentive schemes). 11 Having regard to privacy, confidentiality, defamation and other pertinent legal issues. 12 As is the case for example in recommendations 1.6 (board performance reviews) and 7.2 (annual risk review). Disclosing the fact that a recommendation is followed Where a listed entity follows a recommendation, rather than simply state that fact, it should explain what policies and practices it has in place in that regard and, where applicable, point readers to where they can find further information about those policies and practices. For example, readers are likely to find a statement that: The board has established an audit committee. It has 3 members, all of whom are non-executive directors. A majority of the committee members are independent directors. The committee is also chaired by an independent chair, who is not chair of the board. A copy of the charter of the audit committee is available on the corporate governance page on the company’s website at [insert URL]. Information about the members of the audit committee, their relevant qualifications and experience, the number of times the committee met throughout the most recent reporting period and the individual attendances of members at those meetings is also set out on the corporate governance page on the company’s website. to be more illuminating than: The entity complies with recommendation 4.1 of the ASX Corporate Governance Council Principles and Recommendations. Disclosing the reasons for not following a recommendation An “if not, why not” explanation an entity includes in its corporate governance statement setting out its reasons for not following a recommendation should: • be reasonably detailed and informative so that the market understands why it is that the entity has chosen not to follow that recommendation; and • disclose what, if any, alternative corporate governance practices the entity may have adopted in lieu of those in the recommendation, and explain why those practices are considered more appropriate for the entity than the ones in the recommendation. 5 / Corporate Governance Principles and Recommendations 4th Edition 2019 Security holders are unlikely to find brief statements – such as “the recommendation is not considered appropriate, given the entity’s size and circumstances” or, in the case of those recommendations suggesting that an entity has an audit, risk, nomination or remuneration committee, that “the board as a whole performs the role that such a committee would ordinarily undertake” – to be particularly helpful in understanding why an entity has chosen not to follow a particular recommendation or what alternative corporate governance arrangements the entity may have instituted to address the underlying principle to which that recommendation is directed. Effective date This edition of the Principles and Recommendations takes effect for an entity’s first full financial year commencing on or after 1 January 2020. Accordingly, entities with a 31 December balance date will be expected to measure their governance practices against the recommendations in the fourth edition commencing with the financial year ended 31 December 2020. Entities with a 30 June balance date will be expected to measure their governance practices against the recommendations in the fourth edition commencing with the financial year ended 30 June 2021. The Council would encourage listed entities to adopt the fourth edition earlier, if they wish. Acknowledgments The Principles and Recommendations have benefited from the invaluable contributions made by a number of industry associations, corporate governance experts, listed entities and other stakeholders. The Council is most grateful for their input. ASX Corporate Governance Council / 6 A listed entity should clearly delineate the respective roles and responsibilities of its board and management and regularly review their performance. Recommendation 1.1 A listed entity should have and disclose a board charter setting out: (a) the respective roles and responsibilities of its board and management; and (b) those matters expressly reserved to the board and those delegated to management. Commentary Generally speaking, the board of a listed entity should be responsible under its charter for: • demonstrating leadership; • defining the entity’s purpose and setting its strategic objectives; • approving the entity’s statement of values and code of conduct to underpin the desired culture within the entity; 13 • appointing the chair and, if the entity has one, the deputy chair and/or the “senior independent director”; • appointing and replacing the CEO; • approving the appointment and replacement of other senior executives and the company secretary; 14 • overseeing management in its implementation of the entity’s strategic objectives, instilling of the entity’s values and performance generally; • approving operating budgets and major capital expenditure; 13 See recommendation 3.1 below. 14 In relation to the appointment and removal of the company secretary, see note 28 below. 15 As noted by Commissioner Hayne in the Final Report, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry 1 February 2019, Volume 1, at page 396: “Boards cannot operate properly without having the right information. And boards do not operate effectively if they do not challenge management.”. 16 Some of these matters may be delegated to a committee of the board, with the board retaining the ultimate oversight and decision-making power in respect of the matters so delegated. • overseeing the integrity of the entity’s accounting and corporate reporting systems, including the external audit; • overseeing the entity’s process for making timely and balanced disclosure of all material information concerning the entity that a reasonable person would expect to have a material effect on the price or value of the entity’s securities; • satisfying itself that the entity has in place an appropriate risk management framework (for both financial and non- financial risks) and setting the risk appetite within which the board expects management to operate; • satisfying itself that an appropriate framework exists for relevant information to be reported by management to the board; • whenever required, challenging management and holding it to account; 15 • satisfying itself that the entity’s remuneration policies are aligned with the entity’s purpose, values, strategic objectives and risk appetite; and • monitoring the effectiveness of the entity’s governance practices. 16 The senior executive team will usually be responsible for implementing the entity’s strategic objectives and instilling and reinforcing its values, all while operating within the values, code of conduct, budget and risk appetite set by the board. The senior executive team will also usually be responsible for providing the board with accurate, timely and clear information on the entity’s operations to enable the board to perform its responsibilities. This is not just limited to information about the financial performance of the entity, but also its compliance with material legal and regulatory requirements and any conduct that is materially inconsistent with the values or code of conduct of the entity. Principle 1 / Lay solid foundations for management and oversight 7 / Corporate Governance Principles and Recommendations 4th Edition 2019 The board charter should set out the role and responsibilities of the chair of the board. Usually, the chair will be responsible for leading the board, facilitating the effective contribution of all directors and promoting constructive and respectful relations between directors and between the board and management. The chair will also usually be responsible for approving board agendas and ensuring that adequate time is available for discussion of all agenda items, including strategic issues. If the listed entity has a deputy chair or senior independent director, the board charter should also set out their roles and responsibilities. The board charter should state the entity’s policy on when and how directors may seek independent professional advice at the expense of the entity. This generally should be whenever directors, especially non-executive directors, judge such advice necessary for them to discharge their responsibilities as directors. The nature of matters reserved to the board and those delegated to management will depend on the size, complexity and ownership structure of the entity, and will be influenced by its history and culture, and by the respective skills of its directors and management. These may vary over time as the entity evolves. The board should regularly review the division of functions between the board and management to ensure that it continues to be appropriate to the needs of the entity. Recommendation 1.2 A listed entity should: (a) undertake appropriate checks before appointing a director or senior executive or putting someone forward for election as a director; and (b) provide security holders with all material information in its possession relevant to a decision on whether or not to elect or re-elect a director. Commentary For these purposes, appropriate checks would usually include checks as to the person’s character, experience, education, criminal record and bankruptcy history. 17 The following information about a candidate standing for election or re-election as a director should be provided to security holders to enable them to make an informed decision on whether or not to elect or re-elect the candidate: 17 Listed entities may find the guidance in Australian Standard AS 4811-2006 Employment screening helpful in understanding the types of checks that may be undertaken and how best to undertake them. 18 This applies regardless of who nominates the candidate for appointment or election as a director, including where the candidate nominates himself or herself or is put forward by a security holder or holders (for example, under section 249D, 249F, 252B or 252D of the Corporations Act). • biographical details, including their relevant qualifications and experience and the skills they bring to the board; • details of any other material directorships currently held by the candidate; • in the case of a candidate standing for election as a director for the first time: – confirmation that the entity has conducted appropriate checks into the candidate’s background and experience; – if those checks have revealed any information of concern, that information; – details of any interest, position or relationship that might influence, or reasonably be perceived to influence, in a material respect their capacity to bring an independent judgement to bear on issues before the board and to act in the best interests of the entity as a whole rather than in the interests of an individual security holder or other party; and – if the board considers that the candidate will, if elected, qualify as an independent director, a statement to that effect; • in the case of a candidate standing for re-election as a director: – the term of office currently served by the director; and – if the board considers the director to be an independent director, a statement to that effect; and • a statement by the board as to whether it supports the election or re-election of the candidate and a summary of the reasons why. A candidate for appointment or election as a non-executive director 18 should provide the board or nomination committee with the information above and a consent for the listed entity to conduct any background or other checks the entity would ordinarily conduct. Candidates for appointment, election or re-election as a director should also provide details of their other commitments and an indication of time involved, and should specifically acknowledge to the listed entity that they will have sufficient time to fulfil their responsibilities as a director. ASX Corporate Governance Council / 8 The Council acknowledges that some checks take time and there may be cases where a listed entity will wish to make a provisional appointment of a director or senior executive, or put a resolution to members electing a director, subject to receipt of satisfactory outstanding checks. Where a listed entity does this, it should take particular care to ensure that the director or senior executive gives an unequivocal undertaking to resign should the entity receive an outstanding check that it considers is not satisfactory. This is particularly so for a director, since once they are appointed or elected, they can generally only be removed from office against their will by a resolution of security holders. 19 Recommendation 1.3 A listed entity should have a written agreement with 20 each director and senior executive setting out the terms of their appointment. 21 Commentary Usually the agreement will take the form of a letter of appointment in the case of a non-executive director and a service contract in the case of an executive director or other senior executive. With one exception, the agreement in question should be with the director or senior executive personally rather than an entity supplying their services. 22 This is to ensure that the director or senior executive is personally accountable to the listed entity for any breach of the agreement. 23 The one exception is where an entity is engaging a bona fide professional services firm 24 to provide the services of a CFO, company secretary or other senior executive on an outsourced basis. In that case, it is acceptable for the agreement to be between the entity and the professional services firm. In the case of a non-executive director, the agreement should include: 19 Section 203E of the Corporations Act. 20 The reference in this recommendation to a listed entity having a written agreement with a director or senior executive means having an agreement with the director or senior executive personally rather than with an entity supplying his or her services (see the commentary to this recommendation). 21 It should be noted that a listed entity is required under listing rule 3.16.4 to disclose the material terms of any employment, service or consultancy agreement it or a child entity enters into with its CEO, any of its directors, and any other person or entity who is a related party of its CEO or any of its directors. It is also required to disclose any material variation to such an agreement. 22 For example, under a consultancy agreement between the listed entity and an entity associated with the director or senior executive agreeing to provide his or her services as a director or senior executive. 23 The Council is aware that some directors of listed entities supply their services through a “personal services company” and have their fees paid to that company rather than to the director personally. Provided the director has a personal letter of appointment with the listed entity setting out the director’s duties and responsibilities, such an arrangement is not inconsistent with this recommendation. However, these arrangements do raise other issues that listed entities and directors should consider and take advice on. 24 For the avoidance of doubt, “firm” includes a sole practitioner. 25 See recommendation 3.2. 26 See recommendation 3.4. 27 Listing rule 12.9 requires a listed entity to have a trading policy covering its directors and other key management personnel and regulating trading in its securities during certain “prohibited periods”. • the requirement to disclose the director’s interests and any matters which could affect the director’s independence; • the requirement to comply with key corporate policies, including the entity’s code of conduct, 25 its anti-bribery and corruption policy 26 and its trading policy; 27 • the requirement to notify the entity of, or to seek the entity’s approval before accepting, any new role that could impact upon the time commitment expected of the director or give rise to a conflict of interest; • the entity’s policy on when directors may seek independent professional advice at the expense of the entity (which generally should be whenever directors, especially non- executive directors, judge such advice necessary for them to discharge their responsibilities as directors); • indemnity and insurance arrangements; • ongoing rights of access to corporate information; and • ongoing confidentiality obligations. Recommendation 1.4 The company secretary of a listed entity should be accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board. Commentary The company secretary of a listed entity plays an important role in supporting the effectiveness of the board and its committees. The role of the company secretary should include: • advising the board and its committees on governance matters; • monitoring that board and committee policy and procedures are followed; 9 / Corporate Governance Principles and Recommendations 4th Edition 2019 • coordinating the timely completion and despatch of board and committee papers; • ensuring that the business at board and committee meetings is accurately captured in the minutes; and • helping to organise and facilitate the induction and professional development of directors. Each director should be able to communicate directly with the company secretary and vice versa. The decision to appoint or remove a company secretary should be made or approved by the board. 28 Recommendation 1.5 A listed entity should: (a) have and disclose 29 a diversity policy; (b) through its board or a committee of the board 30 set measurable objectives for achieving gender diversity in the composition of its board, senior executives and workforce generally; and (c) disclose in relation to each reporting period: (1) the measurable objectives set for that period to achieve gender diversity; (2) the entity’s progress towards achieving those objectives; and (3) either: (A) the respective proportions of men and women on the board, in senior executive positions and across the whole workforce (including how the entity has defined “senior executive” for these purposes); or (B) if the entity is a “relevant employer” under the Workplace Gender Equality Act, the entity’s most recent “Gender Equality Indicators”, as defined in and published under that Act. 31 28 Listed companies established in Australia should note section 204D of the Corporations Act, which requires the appointment of a company secretary to be formally resolved, rather than simply approved, by the board. 29 An entity may redact from the disclosed copy of its diversity policy personal or confidential information such as the names and contact details of individual staff involved in diversity issues. 30 If the board decides to delegate this role to a committee of the board (such as the nomination or remuneration committee), this should be reflected in the charter of the committee in question. 31 The Workplace Gender Equality Act applies to non-public sector employers with 100 or more employees in Australia. The Act requires such employers to make annual filings with the Workplace Gender Equality Agency (“WGEA”) disclosing their “Gender Equality Indicators”. These reports are filed annually in respect of the 12 month period ending 31 March. For an entity which chooses to follow recommendation 1.5(c)(3)(B), publishing the URL of the webpage on the WGEA website where its latest “Gender Equality Indicators” are available will be taken to meet that particular recommendation. The Council notes that “Gender Equality Indicators” apply to individual employing entities and are not published on a consolidated basis across groups of entities. They also do not apply to employing entities with less than 100 employees in Australia, nor to employees overseas. As a practical matter, therefore, it may well be that many entities are not able to report meaningfully under recommendation 1.5(c)(3)(B) and should therefore report under recommendation 1.5(c)(3)(A). For further information about the Workplace Gender Equality Act, see the WGEA website: www.wgea.gov.au. 32 For the avoidance of doubt, a listed entity may set a higher percentage than 30% and meet this recommendation. 33 This includes both executive and non-executive directors. If the entity was in the S&P/ASX 300 Index at the commencement of the reporting period, the measurable objective for achieving gender diversity in the composition of its board should be to have not less than 30% 32 of its directors 33 of each gender within a specified period. Commentary Diversity is increasingly seen as an asset to listed entities and a contributor to better overall performance, particularly in a competitive labour market. The diversity objectives the board or a committee of the board sets should include appropriate and meaningful benchmarks that are able to be, and are, monitored and measured. These could involve, for example: • achieving specific numerical targets for the proportion of women on its board, in senior executive roles and in its workforce generally within a specified timeframe; • achieving specific numerical targets for female representation in key operational roles within a specified timeframe with the view to developing a diverse pipeline of talent that can be considered for future succession to senior executive roles; or • achieving specific targets for the “Gender Equality Indicators” in the Workplace Gender Equality Act. Non-numerical objectives such as “introducing a diversity policy” or “establishing a diversity council”, and aspirational objectives such as “achieving a culture of inclusion”, while individually worthwhile, are unlikely to be effective in improving gender diversity unless they are backed up with appropriate numerical targets. The board or committee may wish to consider setting key performance indicators for senior executives on gender participation within their areas of responsibility and linking part of their remuneration (either directly or as part of a “balanced scorecard”) to the achievement of those KPIs. ASX Corporate Governance Council / 10 A listed entity should tailor its gender diversity reporting to reflect its own circumstances and to give an accurate and not misleading impression of the relative participation of women and men in the workplace and the roles in which they are employed. In particular, when reporting the proportion of women in senior executive positions under recommendation 1.5(c)(3)(A), listed entities should clearly define how they are using the term “senior executive”. This could be done, for example, by reference to their relativity in terms of reporting hierarchy to the CEO (eg, CEO – 1, CEO – 2 etc 34 ) or by describing the roles that term covers (eg, leadership, management or professional speciality). The board of a listed entity should also include gender diversity as a relevant consideration in its succession planning. The Council would encourage larger listed entities with significant numbers of employees to show leadership on gender diversity issues and to provide more granular disclosures of the relative participation of women and men in senior executive roles than the base levels set out in this recommendation. This includes: • where they define “senior executive” for the purposes of recommendation 1.5(c)(3)(A) to include more than one level within the organisation (eg, CEO – 1 and CEO – 2), reporting the numbers of women at each level rather than, or as well as, cumulatively across all levels; and • reporting the relative participation of women and men in management roles immediately below senior executive (eg, down to CEO – 3 and CEO – 4). Each of these measures will allow readers to gain a better understanding of the progress of women in the organisation through the different levels of management and of the “pipeline” of candidates potentially available for higher management roles. The Council would encourage listed entities to benchmark their position on gender diversity against their peers and to undertake gender pay equity audits to gain a stronger insight into the effectiveness of their gender diversity programs and initiatives and to consider disclosing any emerging themes or actions taken as a result. The Council would also recommend that boards of listed entities consider other facets of diversity in addition to gender when considering the composition of the board. In particular, having directors of different ages, ethnicities and backgrounds can help bring different perspectives and experiences to bear and avoid “groupthink” or other cognitive biases in decision making. A listed entity may find the suggestions in Box 1.5 helpful when formulating its diversity policy. 34 CEO – 1 refers to the layer of senior executives reporting directly to the CEO, CEO – 2 the next layer of management reporting to those senior executives, and so on. Box 1.5 / Suggestions for the content of a diversity policy • Link the policy to the organisation’s statement of values. • Articulate the corporate benefits of diversity in a competitive labour market and the importance of being able to attract, retain and motivate employees from the widest possible pool of available talent. • Express the organisation’s commitment to inclusion at all levels of the organisation, regardless of gender, marital or family status, sexual orientation, gender identity, age, disabilities, ethnicity, religious beliefs, cultural background, socio-economic background, perspective and experience. • Emphasise that in order to have an inclusive workplace, discrimination, harassment, vilification and victimisation cannot and will not be tolerated. • Commit to ensuring that recruitment and selection practices at all levels (from the board downwards) are appropriately structured so that a diverse range of candidates are considered and guarding against any conscious or unconscious biases that might discriminate against certain candidates. • Commit to designing and implementing programs that will assist in the development of a broader and more diverse pool of skilled and experienced employees and that, over time, will prepare them for senior management and board positions. • Recognise that employees (female and male) at all levels may have domestic responsibilities and adopt flexible work practices that will assist them to meet those responsibilities. • Provide opportunities for employees on extended parental leave to maintain their connection with the entity, for example, by offering them the option (without any obligation) to receive all-staff communications and to attend work functions and training programs. • State that the policy will be periodically reviewed to check that it is operating effectively and whether any changes are required to the policy. 11 / Corporate Governance Principles and Recommendations 4th Edition 2019 Recommendation 1.6 A listed entity should: (a) have and disclose a process for periodically evaluating the performance of the board, its committees and individual directors; and (b) disclose for each reporting period whether a performance evaluation has been undertaken in accordance with that process during or in respect of that period. Commentary The board performs a pivotal role in the governance framework of a listed entity. It is essential that the board has in place a proper process for regularly reviewing, preferably annually, the performance of the board, its committees and individual directors. Particular attention should be paid to addressing issues that may emerge from that review, such as the currency of a director’s knowledge and skills or if a director’s performance has been impacted by other commitments. The board should consider periodically using external facilitators to conduct its performance reviews. A suitable non-executive director (such as the deputy chair or the senior independent director, if the entity has one) should be responsible for the performance evaluation of the chair, after having canvassed the views of the other directors. Recommendation 1.7 A listed entity should: (a) have and disclose a process for evaluating the performance of its senior executives at least once every reporting period; and (b) disclose for each reporting period whether a performance evaluation has been undertaken in accordance with that process during or in respect of that period. Commentary The performance of a listed entity’s senior executives will usually drive the performance of the entity. It is essential that a listed entity has in place a proper process for regularly reviewing the performance of its senior executives and addressing any issues that may emerge from that review. ASX Corporate Governance Council / 12 The board of a listed entity should be of an appropriate size and collectively have the skills, commitment and knowledge of the entity and the industry in which it operates, to enable it to discharge its duties effectively and to add value. Recommendation 2.1 The board of a listed entity should: (a) have a nomination committee which: (1) has at least three members, 35 a majority of whom are independent directors; and (2) is chaired by an independent director, and disclose: (3) the charter of the committee; (4) the members of the committee; and (5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or (b) if it does not have a nomination committee, disclose that fact and the processes it employs to address board succession issues and to ensure that the board has the appropriate balance of skills, knowledge, experience, independence and diversity to enable it to discharge its duties and responsibilities effectively. Commentary A high performing, effective board is essential for the proper governance of a listed entity. The board needs to have an appropriate number of independent non-executive directors who can challenge management and hold them to account, and also represent the best interests of the listed entity and its security holders as a whole rather than those of individual security holders or interest groups. 35 The Council recognises that a number of listed entities have nomination committees comprising the entire board. Provided the nomination committee otherwise has an appropriate charter and meets as a committee outside of normal board meetings, this practice complies with recommendation 2.1(a). The board needs to be of sufficient size so that the requirements of the business can be met and changes to the composition of the board and its committees can be managed without undue disruption. However, it should not be so large as to be unwieldy. Board renewal is also critical to performance. To facilitate the effective functioning of the board and to promote investor confidence, there should be a formal, rigorous and transparent process for the appointment and reappointment of directors to the board. Having a separate nomination committee can be an efficient and effective mechanism to bring the transparency, focus and independent judgement needed on decisions regarding the composition of the board. The role of the nomination committee is usually to review and make recommendations to the board in relation to: • board succession planning generally; • induction and continuing professional development programs for directors; • the development and implementation of a process for evaluating the performance of the board, its committees and directors; • the process for recruiting a new director, including evaluating the balance of skills, knowledge, experience, independence and diversity on the board and, in the light of this evaluation, preparing a description of the role and capabilities required for a particular appointment; • the appointment and re-election of directors; and • ensuring there are plans in place to manage the succession of the CEO and other senior executives. The nomination committee should have a charter that clearly sets out its role and confers on it all necessary powers to perform that role. This will usually include the right to seek advice from external consultants or specialists where the committee considers that necessary or appropriate. Principle 2 / Structure the board to be effective and add value 13 / Corporate Governance Principles and Recommendations 4th Edition 2019 The nomination committee should be of sufficient size and independence to discharge its mandate effectively. Consideration should also be given to ensuring that it has an appropriate diversity of membership to avoid entrenching “groupthink” or other cognitive biases. The chair of the board may chair the nomination committee, however, a separate chair should be appointed if and when the nomination committee is dealing with the appointment of a successor to the chair. The boards of some listed entities may decide that they are able to deal efficiently and effectively with board composition and succession issues without establishing a separate nomination committee. If they do, the entity should disclose in its annual report or on its website the fact that it does not have a nomination committee and explain the processes it employs to address board succession issues and to ensure that the board has the appropriate balance of skills, knowledge, experience, independence and diversity to enable it to discharge its duties and responsibilities effectively. The board or the nomination committee should regularly review the time required from a non-executive director and whether directors are meeting that requirement. A non-executive director should inform the chair of the board and the chair of the nomination committee before accepting any new appointment as a director of another listed entity, any other material directorship or any other position with a significant time commitment attached. Recommendation 2.2 A listed entity should have and disclose a board skills matrix setting out the mix of skills that the board currently has or is looking to achieve in its membership. Commentary A board “skills matrix” is a tool that can help the board identify any gaps in its collective skills that should be addressed by providing professional development to existing directors 36 or taking on new directors. It can also assist the board in its succession planning. Disclosing the board skills matrix gives useful information to investors and helps to increase the accountability of the board in ensuring it has the skills to discharge its obligations effectively and to add value. The board should regularly review its skills matrix to make sure it covers the skills needed to address existing and emerging business and governance issues relevant to the entity. 36 See recommendation 2.6 below. 37 Guidance on what should be included in a board skills matrix can be found in the Governance institute of Australia’s Good Governance Guide Creating and disclosing a board skills matrix , available online at: www.governanceinstitute.com.au/boardskillsmatrix. There is no prescribed format for a board skills matrix. 37 It can set out either the mix of skills that the board currently has or the mix of skills that the board is looking to achieve in its membership or both. If an entity chooses to do the former, this need only be done collectively across the board as a whole, without identifying the presence or absence of particular skills by a particular director. Commercially sensitive information, such as the fact that the board may be looking to acquire a particular skill as part of an as-yet unannounced and incomplete plan to move into a different field of activity, can be excluded. Whichever format it follows, it would be helpful to investors for the entity to explain what it means when it refers to a particular skill in its board skills matrix and the criteria a director must meet to be considered to have that skill. Recommendation 2.3 A listed entity should disclose: (a) the names of the directors considered by the board to be independent directors; (b) if a director has an interest, position or relationship of the type described in Box 2.3 but the board is of the opinion that it does not compromise the independence of the director, the nature of the interest, position or relationship in question and an explanation of why the board is of that opinion; and (c) the length of service of each director. Commentary To describe a director as “independent” carries with it a particular connotation that the director is not aligned with the interests of management or a substantial holder and can and will bring an independent judgement to bear on issues before the board. It is an appellation that gives great comfort to security holders and not one that should be applied lightly. A director of a listed entity should only be characterised and described as an independent director if he or she is free of any interest, position or relationship that might influence, or reasonably be perceived to influence, in a material respect their capacity to bring an independent judgement to bear on issues before the board and to act in the best interests of the entity as a whole rather than in the interests of an individual security holder or other party. ASX Corporate Governance Council / 14 Examples of interests, positions and relationships that might raise issues about the independence of a director are set out in Box 2.3. Where a director falls within one or more of these examples, the board should rule the director not to be independent unless it is clear that the interest, position or relationship in question is not material and will not interfere with the director’s capacity to bring an independent judgement to bear on issues before the board and to act in the best interests of the entity as a whole rather than in the interests of an individual security holder or other party. A candidate for election as a director of a listed entity should disclose to the entity all interests, positions and relationships that may bear on their independence. Those matters in turn should be disclosed to security holders in the materials given to security holders in support of their election. If there is a change in a non-executive director’s interests, positions or relationships that could bear upon their independence, the non-executive director should inform the board or the nomination committee at the earliest opportunity. The board or the nomination committee should regularly assess the independence of each non-executive director. That assessment should be made at least annually at or around the time that the board or the nomination committee considers candidates for election or re-election to the board. In the case of a change in a non-executive director’s interests, positions or relationships, the assessment should be made as soon as practicable after the board or the nomination committee becomes aware of the change. If the board determines that a director’s status as an independent director has changed, that determination should be disclosed and explained in a timely manner to the market. In relation to the fourth example in Box 2.3 (is, represents, or is an officer or employee of, or professional adviser to, a substantial holder), the holding of securities in the entity may help to align the interests of a director with those of other security holders, and such holdings are therefore not discouraged. The example simply reflects and addresses a perception that: • a director who is a substantial holder in the entity is likely to have such a proportion of their personal wealth tied up in that holding that they have a qualitatively different interest to security holders generally; while • a director who represents, or is or has been within the last three years an officer or employee of, or professional adviser to, a substantial holder is likely to have a bias towards the individual interests of that substantial holder rather than the interests of security holders generally. In relation to the fifth example in Box 2.3 (close personal ties with someone who is not independent), these ties may be based on family, friendship or other social or business connections. In relation to the last example in Box 2.3 (length of service as a director), the Council recognises that the interests of a listed entity and its security holders are likely to be well served by having a mix of directors, some with a longer tenure with a deep understanding of the entity and its business and some with a shorter tenure with fresh ideas and perspective. It also recognises that the chair of the board will frequently fall into the former category rather than the latter. The mere fact that a director has served on a board for a substantial period does not mean that the director has become too close to management or a substantial holder to be considered independent. However, the board should regularly assess whether that might be the case for any director who has served in that position for more than 10 years. Box 2.3 / Factors relevant to assessing the independence of a director Examples of interests, positions and relationships that might raise issues about the independence of a director of an entity include if the director: • is, or has been, employed in an executive capacity by the entity or any of its child entities and there has not been a period of at least three years between ceasing such employment and serving on the board; • receives performance-based remuneration (including options or performance rights) from, or participates in an employee incentive scheme of, the entity; • is, or has been within the last three years, in a material business relationship (eg as a supplier, professional adviser, consultant or customer) with the entity or any of its child entities, or is an officer of, or otherwise associated with, someone with such a relationship; • is, represents, or is or has been within the last three years an officer or employee of, or professional adviser to, a substantial holder; • has close personal ties with any person who falls within any of the categories described above; or • has been a director of the entity for such a period that their independence from management and substantial holders may have been compromised. In each case, the materiality of the interest, position or relationship needs to be assessed by the board to determine whether it might interfere, or might reasonably be seen to interfere, with the director’s capacity to bring an independent judgement to bear on issues before the board and to act in the best interests of the entity as a whole rather than in the interests of an individual security holder or other party. 15 / Corporate Governance Principles and Recommendations 4th Edition 2019 Recommendation 2.4 A majority of the board of a listed entity should be independent directors. Commentary Investors expect, and the law requires, 38 the directors of a listed entity to act in the best interests of the entity as a whole rather than in the interests of an individual security holder or other party. Having a majority of independent directors makes it harder for any individual or small group of individuals to dominate the board’s decision-making and maximises the likelihood that the decisions of the board will reflect the best interests of the entity as a whole and not be biased towards the interests of management or any other person or group with whom a non-independent director may be associated. Non-executive directors should consider the benefits of conferring periodically as a group without senior executives present. Recommendation 2.5 The chair of the board of a listed entity should be an independent director and, in particular, should not be the same person as the CEO of the entity. Commentary Having an independent chair can contribute to a culture of openness and constructive challenge that allows for a diversity of views to be considered by the board. Good governance demands an appropriate separation between those charged with managing a listed entity and those responsible for overseeing its managers. Having the role of chair and CEO exercised by the same individual is unlikely to be conducive to the board effectively performing its role of challenging management and holding them to account. If the chair is not an independent director, a listed entity should consider the appointment of an independent director as the deputy chair or as the “senior independent director”, who can fulfil the role whenever the chair is conflicted. Even where the chair is an independent director, having a deputy chair or senior independent director can also assist the board in reviewing the performance of the chair and in providing a separate channel of communication for security holders (especially where those communications concern the chair). 38 See sections 180 and 181 (in the case of a listed company) and 601FD(1)(b) and (c) (in the case of a listed trust) of the Corporations Act. 39 In ASIC v Healey & Ors [2011] FCA 717 (available online at: www.austlii.edu.au/au/cases/cth/FCA/2011/717.html), the Federal Court held that it is the duty of every director of an entity subject to section 344 of the Corporations Act (which includes public companies, registered managed investment schemes and disclosing entities) to read the financial statements of the entity carefully and to consider whether what they disclose is consistent with the director’s own knowledge of the entity’s affairs. It is important that a listed entity’s board have a diverse range of skills and experience and this necessarily means that not all directors will have the same level of accounting skills and experience. Nevertheless, it is in the interests of a listed entity and its security holders (and also in the personal interests of the director concerned) that each director of the entity has an appropriate base level of understanding of accounting matters. The role of chair is demanding, requiring a significant time commitment. The chair’s other positions should not be such that they are likely to hinder effective performance of the role. Recommendation 2.6 A listed entity should have a program for inducting new directors and for periodically reviewing whether there is a need for existing directors to undertake professional development to maintain the skills and knowledge needed to perform their role as directors effectively. Commentary All new directors should be offered induction training, tailored to their existing skills, knowledge and experience, to position them to discharge their responsibilities effectively and to add value. This could include, for example, having interviews with key senior executives to gain an understanding of the entity’s structure, business operations, history, culture and key risks, and conducting site visits of key operations. If a director is not familiar with the legal framework that governs the entity, the entity’s induction program should include training on their legal duties and responsibilities as a director under the key legislation governing the entity and the listing rules (including ASX’s continuous and periodic reporting requirements). If a director does not have accounting skills or knowledge, the entity’s induction program should also include training on key accounting matters and on the responsibilities of directors in relation to the entity’s financial statements. 39 The board or the nomination committee of a listed entity should regularly assess whether the directors as a group have the skills, knowledge and experience to deal with new and emerging business and governance issues. Professional development for directors should be considered where gaps are identified and they are not expected to be addressed in the short term by new appointments. The board or the nomination committee should also ensure that directors receive briefings on material developments in laws, regulations and accounting standards relevant to the entity. ASX Corporate Governance Council / 16 A listed entity should instil and continually reinforce a culture 40 across the organisation of acting lawfully, ethically and responsibly. Recommendation 3.1 A listed entity should articulate and disclose its values. Commentary A listed entity’s values are the guiding principles and norms that define what type of organisation it aspires to be and what it requires from its directors, senior executives and employees to achieve that aspiration. Values create a link between the entity’s purpose (why it exists) and its strategic goals (what it hopes to do) by expressing the standards and behaviours it expects from its directors, senior executives and employees to fulfil its purpose and meet its goals (how it will do it). Investors and the broader community expect a listed entity to act lawfully, ethically and responsibly and that expectation should be reflected in its statement of values. In formulating its values, a listed entity should consider what behaviours are needed from its officers and employees to build long term sustainable value for its security holders. This includes the need for the entity to preserve and protect its reputation and standing in the community and with key stakeholders, such as customers, employees, suppliers, creditors, law makers and regulators. 41 The board should approve an entity’s statement of values and charge the senior executive team with the responsibility of inculcating those values across the organisation. This includes ensuring that all employees receive appropriate training on the values and senior executives continually referencing and reinforcing those values in their interactions with staff (ie setting the “tone at the top”). 40 Listed entities may find the guidance in Managing Culture: A good practice guide, First edition 2017 helpful. This is a joint publication of the Institute of Internal Auditors – Australia, The Ethics Centre, the Governance Institute of Australia and Chartered Accountants Australia and New Zealand. 41 To paraphrase Commissioner Hayne from the Interim Report, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry 28 September 2018, Volume 1, at pages 54-55: “As [a commercial enterprise], [a listed] entity… rightly pursues profit. Directors and other officers of the entities owe duties to shareholders to do that. But the duty to pursue profit is one that has a significant temporal dimension. The duty is to pursue the long term advantage of the enterprise. Pursuit of long term advantage (as distinct from short term gain) entails preserving and enhancing the reputation of the enterprise… And, lest there be any doubt, it also entails obeying the law. But to preserve and enhance a reputation… the enterprise must do more than not break the law. It must seek to do ‘the right thing’.” 42 An entity may redact from the disclosed copy of its code of conduct personal or confidential information such as the names and contact details of individual staff involved in conduct issues. Recommendation 3.2 A listed entity should: (a) have and disclose 42 a code of conduct for its directors, senior executives and employees; and (b) ensure that the board or a committee of the board is informed of any material breaches of that code. Commentary A listed entity should articulate the standards of behaviour expected of its directors, senior executives and employees in a code of conduct. The board or a committee of the board should be informed of any material breaches of the entity’s code of conduct, as they may be indicative of issues with the culture of the organisation. For a code of conduct to be effective, all employees must receive appropriate training on their obligations under the code. Directors and senior executives must speak and act consistently with the code (again, setting the “tone at the top”) and reinforce it by taking appropriate and proportionate disciplinary action against those who breach it. A listed entity may find the suggestions in Box 3.2 helpful in formulating its code of conduct. Principle 3 / Instil a culture of acting lawfully, ethically and responsibly 17 / Corporate Governance Principles and Recommendations 4th Edition 2019 43 An entity may redact from the disclosed copy of its whistleblower policy personal or confidential information such as the names and contact details of individual staff involved in the whistleblower process. Recommendation 3.3 A listed entity should: (a) have and disclose 43 a whistleblower policy; and (b) ensure that the board or a committee of the board is informed of any material incidents reported under that policy. Commentary In most cases, the best source of information about whether a listed entity is living up to its values are its employees. They should be encouraged to speak up about any unlawful, unethical or irresponsible behaviour within the organisation through an appropriate whistleblower policy. The board or a committee of the board should be informed of material incidents reported under the entity’s whistleblower policy, as they may be indicative of issues with the culture of the organisation. A listed entity may find the suggestions in Box 3.3 helpful in formulating its whistleblower policy. Box 3.3 / Suggestions for the content of a whistleblower policy • Link the policy to the organisation’s statement of values. • Clearly identify the types of concerns that may be reported under the policy and how and to whom reports may be made (including to senior executives and the board). • Explain how the confidentiality of the whistleblower’s identity is safeguarded and the whistleblower is protected from retaliation or victimisation. • Outline the processes to follow up and investigate reports made under the policy. • Provide for the training of employees about the whistleblower policy and their rights and obligations under it. • Provide for the training of managers and others who may receive whistleblower reports about how to respond to them. • State that the policy will be periodically reviewed to check that it is operating effectively and whether any changes are required to the policy. Box 3.2 / Suggestions for the content of a code of conduct • Express or cross-reference the organisation’s values. • State the organisation’s expectation that all directors, senior executives and employees will: – act in accordance with the entity’s stated values and in the best interests of the entity; – act honestly and with high standards of personal integrity; – comply with all laws and regulations that apply to the entity and its operations; – act ethically and responsibly; – treat fellow staff members with respect and not engage in bullying, harassment or discrimination; – deal with customers and suppliers fairly; – disclose and deal appropriately with any conflicts between their personal interests and their duties as a director, senior executive or employee; – not take advantage of the property or information of the entity or its customers for personal gain or to cause detriment to the entity or its customers; – not take advantage of their position or the opportunities arising therefrom for personal gain; and – report breaches of the code to the appropriate person or body within the organisation. • State that the code will be periodically reviewed to check that it is operating effectively and whether any changes are required to the code. ASX Corporate Governance Council / 18 Recommendation 3.4 A listed entity should: (a) have and disclose 44 an anti-bribery and corruption policy; and (b) ensure that the board or a committee of the board is informed of any material breaches of that policy. Commentary Giving bribes or other improper payments or benefits to public officials is a serious criminal offence and can damage a listed entity’s reputation and standing in the community. The board or a committee of the board should be informed of any material incidents of bribery or corruption, as they may be indicative of issues with the culture of the organisation. A listed entity’s anti-bribery and corruption policy can be a stand-alone policy or form part of its code of conduct. A listed entity may find the suggestions in Box 3.4 helpful in formulating its anti-bribery and corruption policy. 44 An entity may redact from the disclosed copy of its anti-bribery and corruption policy personal or confidential information such as the names and contact details of individual staff involved in anti-bribery and corruption issues. Box 3.4 / Suggestions for the content of an anti-bribery and corruption policy • Link the policy to the organisation’s statement of values. • Acknowledge the serious criminal and civil penalties that may be incurred and the reputational damage that may be done if the organisation is involved in bribery or corruption. • Prohibit the giving of bribes or other improper payments or benefits to public officials; • Prohibit the payment of secret commissions to those acting in an agency or fiduciary capacity. • Include appropriate controls around political donations and offering or accepting gifts, entertainment or hospitality. • Provide for the training of managers and employees likely to be exposed to bribery or corruption about how to recognise and deal with it. • Require breaches of the policy to be reported to the appropriate person or body within the organisation. • State that the policy will be periodically reviewed to check that it is operating effectively and whether any changes are required to the policy. 19 / Corporate Governance Principles and Recommendations 4th Edition 2019 A listed entity should have appropriate processes to verify the integrity of its corporate reports. Recommendation 4.1 The board of a listed entity should: (a) have an audit committee 45 which: (1) has at least three members, all of whom are non- executive directors and a majority of whom are independent directors; and (2) is chaired by an independent director, who is not the chair of the board, and disclose: (3) the charter of the committee; (4) the relevant qualifications and experience of the members of the committee; and (5) in relation to each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or (b) if it does not have an audit committee, disclose that fact and the processes it employs that independently verify and safeguard the integrity of its corporate reporting, including the processes for the appointment and removal of the external auditor and the rotation of the audit engagement partner. Commentary While ultimate responsibility for a listed entity’s financial statements rests with the full board, having a separate audit committee can be an efficient and effective mechanism to bring the transparency, focus and independent judgement needed to oversee the corporate reporting process. 45 It should be noted that a listed entity which is included in the S&P All Ordinaries Index at the beginning of its financial year is required under listing rule 12.7 to have an audit committee for the entire duration of that financial year. If it is included in the S&P/ASX 300 Index at the beginning of its financial year, it must also comply with the structure and disclosure requirements in paragraph (a) of recommendation 4.1 for the whole of that financial year, unless it had been included in that index for the first time less than 3 months before the beginning of that financial year. An entity that is included in the S&P/ASX 300 Index for the first time less than 3 months before the first day of its financial year but did not comply with the structure and disclosure requirements in paragraph (a) of recommendation 4.1 at that date must take steps so that it complies with those requirements within 3 months of the beginning of the financial year. The role of the audit committee is usually to review and make recommendations to the board in relation to: • the adequacy of the entity’s corporate reporting processes and internal control framework; • whether the entity’s financial statements reflect the understanding of the committee members of, and otherwise provide a true and fair view of, the financial position and performance of the entity; • the appropriateness of the accounting judgements or choices exercised by management in preparing the entity’s financial statements; • the appointment or removal of the external auditor; • the fees payable to the auditor for audit and non-audit work; • the rotation of the audit engagement partner; • the scope and adequacy of the external audit; • the independence and performance of the external auditor; • any proposal for the external auditor to provide non- audit services and whether it might compromise the independence of the external auditor; • if the entity has an internal audit function: – the appointment or removal of the head of internal audit; – the scope and adequacy of the internal audit work plan; and – the independence, objectivity and performance of the internal audit function. Principle 4 / Safeguard the integrity of corporate repor ts ASX Corporate Governance Council / 20 The audit committee should have a charter 46 that clearly sets out its role and confers on it all necessary powers to perform that role. This will usually include the right to obtain information, interview management and internal and external auditors (with or without management present), and seek advice from external consultants or specialists where the committee considers that necessary or appropriate. The audit committee should be of sufficient size and independence, and its members between them should have the accounting and financial expertise and a sufficient understanding of the industry in which the entity operates, to be able to discharge the committee’s mandate effectively. The boards of some listed entities may decide that they are able to oversee the corporate reporting process efficiently and effectively without establishing a separate audit committee. If they do, the entity should disclose in its annual report or on its website the fact that it does not have an audit committee and explain the processes it employs that independently verify and safeguard the integrity of its corporate reporting (including, but not limited to, the appointment or removal of the external auditor and the rotation of the audit engagement partner). Recommendation 4.2 The board of a listed entity should, before it approves the entity’s financial statements for a financial period, receive from its CEO and CFO a declaration that, in their opinion, the financial records of the entity have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the entity and that the opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. Commentary Section 295A of the Corporations Act requires each person who performs the CEO or CFO function in a listed entity established in Australia to provide a declaration that, in their opinion, the financial records of the entity for a financial year have been properly maintained in accordance with the Act and that the financial statements and the notes for the financial year comply with the accounting standards and give a true and fair view of the financial position and performance of the entity. The declaration must be given before the directors approve the financial statements for the financial year. 47 46 Listed entities may find the sample audit committee charter in Audit Committees: A Guide to Good Practice, Third Edition (2017) helpful. This is a joint publication of the Australian Institute of Company Directors, the Australian Auditing Standards Board, and the Institute of Internal Auditors – Australia. 47 For these purposes, “approve” means make the declaration required of directors under section 295(4) of the Corporations Act that (amongst other things) the financial statements comply with accounting standards and give a true and fair view. Note that the fact that the directors receive such a declaration from the CEO and CFO does not derogate from their responsibility for ensuring that the financial statements comply with the Corporations Act (section 295A(8)). 48 “Periodic corporate report” is defined in the glossary. 49 “Integrated report” has the meaning given in the International Framework, available online at: www.integratedreporting.org/wp-content/uploads/2013/12/13-12-08- THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf. The principles of integrated reporting can be used in preparing existing reports, for example, the directors’ report or the operating and financial review. Similar requirements may apply to listed entities established in other jurisdictions under their local law. This recommendation largely mirrors the declaration required under section 295A but extends it to include a declaration by the CEO and CFO that their opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. It also extends it to apply to the financial statements for any financial period, not just for the financial year. The board of a listed entity subject to section 295A of the Corporations Act or an equivalent provision under the law of its home jurisdiction can receive the one declaration from the CEO and CFO that meets both the requirements of that Act or law and this recommendation. The board of a listed entity established outside Australia that is not subject to section 295A of the Corporations Act or an equivalent provision under the law of its home jurisdiction should nonetheless require an equivalent declaration from the CEO and CFO. Recommendation 4.3 A listed entity should disclose its process to verify the integrity of any periodic corporate report 48 it releases to the market that is not audited or reviewed by an external auditor. Commentary Increasingly, investors are relying on a broader range of periodic corporate reports than audited or reviewed financial statements to inform their investment decisions. This includes an entity’s annual directors’ reports, quarterly activity reports, quarterly cash flow reports and, in some cases, integrated reports (if prepared as a separate annual report) 49 and sustainability reports. Where a corporate report of this type is not subject to audit or review by an external auditor, it is important that investors understand the process by which the entity has satisfied itself that the report is materially accurate, balanced and provides investors with appropriate information to make informed investment decisions. This can be disclosed in the report itself or more generally in the entity’s governance disclosures in its annual report or on its website. 21 / Corporate Governance Principles and Recommendations 4th Edition 2019 A listed entity should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities. Recommendation 5.1 A listed entity should have and disclose 50 a written policy for complying with its continuous disclosure obligations under listing rule 3.1. Commentary Listing rule 3.1 requires a listed entity, subject to certain exceptions, to disclose to ASX immediately any information concerning it that a reasonable person would expect to have a material effect on the price or value of its securities. A listed entity should have a written policy directed to ensuring that it complies with this obligation so that all investors have equal and timely access to material information concerning the entity – including its financial position, performance, ownership and governance. In designing its disclosure policy, a listed entity should have regard to ASX Listing Rules Guidance Note 8 Continuous Disclosure: Listing Rules 3.1 – 3.1B and to the 10 principles set out in ASIC Regulatory Guide 62 Better disclosure for investors. A listed entity may find the suggestions in Box 5.1 helpful in formulating its continuous disclosure policy. 51 Recommendation 5.2 A listed entity should ensure that its board receives copies of all material market announcements promptly after they have been made. Commentary This is to ensure that the board has timely visibility of the nature and quality of the information being disclosed to the market and the frequency of such disclosures. 50 An entity may redact from the disclosed copy of its continuous disclosure policy personal or confidential information such as the names and contact details of individual staff involved in the disclosure process. 51 See the joint publication by Chartered Secretaries Australia (now Governance Institute of Australia) and the Australian Investor Relations Association entitled Handling confidential information: Principles of good practice available online at: www.governanceinstitute.com.au/confidentialprinciples. Box 5.1 / Suggestions for the content of a continuous disclosure policy • Highlight the importance of the entity’s market announcements being accurate, balanced and expressed in a clear and objective manner that allows investors to assess the impact of the information when making investment decisions. • Outline the roles and responsibilities of directors, officers and employees in complying with the entity’s disclosure obligations. • Set out the entity’s processes to review and authorise market announcements. • Highlight the importance of safeguarding the confidentiality of corporate information to avoid premature disclosure. 51 • Set out or cross-refer to the entity’s policy on media contact and comment. • Address the potential disclosure issues associated with analyst briefings and responses to security holder questions. • Set out the entity’s processes for responding to or avoiding the emergence of a false market in its securities. • State that the policy will be periodically reviewed to check that it is operating effectively and whether any changes are required to the policy. Principle 5 / Make timely and balanced disclosure ASX Corporate Governance Council / 22 Recommendation 5.3 A listed entity that gives a new and substantive investor or analyst presentation should release a copy of the presentation materials on the ASX Market Announcements Platform ahead of the presentation. Commentary This recommendation is directed to ensuring equality of information among investors and applies regardless of whether the presentation contains material new information required to be disclosed under listing rule 3.1. Examples of “substantive” presentations caught by this recommendation include results presentations and the types of presentations typically given at annual general meetings, investor days and broker conferences. Where practicable, the entity should consider providing security holders the opportunity to participate in the presentation, for example, by providing them with dial-in details or providing a link to a live webcast. If that is not practicable, the entity should consider making available on its website a recording or transcript of the presentation as soon as it reasonably can. This recommendation is not intended to apply to private meetings between a listed entity and an investor or analyst. However, any entity that has such a meeting must be careful not to disclose in the meeting any information that a reasonable person would expect to have a material effect on the price or value of its securities that has not already been disclosed to the market. The Council recognises that listed entities may give a series of presentations to analysts and investors over a short period of time that contain materially the same information but have been tailored for each audience. The Council would not regard the second and subsequent presentations in such a series as “new” presentations for these purposes and, provided they do not contain any new market sensitive information, would not expect them to be published on the ASX Market Announcements Platform. 23 / Corporate Governance Principles and Recommendations 4th Edition 2019 Principle 6 / Respect the rights of security holders A listed entity should provide its security holders with appropriate information and facilities to allow them to exercise their rights as security holders effectively. Recommendation 6.1 A listed entity should provide information about itself and its governance to investors via its website. Commentary A fundamental underpinning of the corporate governance framework for listed entities is that security holders should be able to hold the board and, through the board, management to account for the entity’s performance. For this to occur, a listed entity needs to engage with its security holders and provide them with appropriate information and facilities to allow them to exercise their rights as security holders effectively. This includes: • giving them ready access to information about the entity and its governance; • communicating openly and honestly with them; and • encouraging and facilitating their participation in meetings of security holders. In the digital age, investors expect information about listed entities to be freely and readily available online. A listed entity should have a website with a “corporate governance” landing page from where all relevant corporate governance information can be accessed. There should be an intuitive and easily located link to this page in the navigation menu for the entity’s website. 52 A listed entity should include in the corporate governance area of its website links to: • the names, photographs and brief biographical information for each of its directors and senior executives; • its constitution, its board charter and the charters of each of its board committees; • a statement of the entity’s values; 53 52 For example, under an “About Us”, “Investor Centre” or “Information for Shareholders/Unitholders” menu item. 53 See recommendation 3.1 above. 54 Such as the dial-in details for a conference call on a results presentation and a link to the URL for a web-cast of an AGM. • the corporate governance policies and other corporate governance materials referred to in these recommendations. A listed entity should also include in an appropriate area of its website links to: • copies of its annual directors’ reports, financial statements and other corporate reports; • copies of its announcements to ASX; • copies of notices of meetings of security holders and any accompanying documents; • copies of any documents tabled or otherwise made available at meetings of security holders and, if it keeps them, a recording or transcript of the meetings; and • copies of any materials distributed at investor or analyst presentations and, if it keeps them, a recording or transcript of the presentations, and keep this material available on its website for a reasonable period. Investors will also find it helpful if a listed entity includes in an appropriate area of its website: • an overview of the entity’s current business; • a description of how the entity is structured; • a summary of the entity’s history; • a key events calendar showing the expected dates in the forthcoming year for: – results presentations and other significant events for investors and analysts; – the AGM; – books closing dates for determining entitlements to dividends or distributions; and – ex-dividend and payment dates for dividends or distributions; • once they are known, the time, venue and other relevant details 54 for results presentations and the AGM; • if the entity has different classes of securities on issue, a brief description of those different classes and the rights attaching to them; • historical information about the market prices of the entity’s securities; ASX Corporate Governance Council / 24 • a description of the entity’s dividend or distribution policy; • information about the entity’s dividend or distribution history; • copies of media releases the entity makes; • contact details for enquiries from security holders, analysts or the media; • contact details for its securities registry; and • links to download key security holder forms, such as transfer and transmission forms, dividend or distribution reinvestment plan forms etc. Recommendation 6.2 A listed entity should have an investor relations program that facilitates effective two-way communication with investors. 55 Commentary A listed entity’s investor relations program should be tailored to the individual circumstances of the entity. For smaller entities, it may involve little more than actively engaging with security holders at the AGM, meeting with them upon request and responding to any enquiries they may make from time to time. For larger entities, it is likely to involve a detailed program of scheduled and ad hoc interactions with institutional investors, retail investor groups, sell-side and buy-side analysts, proxy advisers and the financial media. A primary aim of an investor relations program should be to allow investors and other financial market participants to gain a greater understanding of the entity’s business, governance, financial performance and prospects. However, it should not just involve one way communication from the entity to the market but also provide an opportunity for investors and other financial market participants to express their views to the entity on matters of concern or interest to them. A listed entity’s investor relations program may also run in tandem with a wider stakeholder engagement program involving interactions with politicians, bureaucrats, regulators, unions, employees, consumer groups, environmental groups, local community groups and other stakeholders. While the focus of many investor relations programs will be on larger investors and financial market participants who service larger investors, listed entities should also seek opportunities to engage with retail investors and the organisations that represent them, to understand the matters of concern or interest to smaller investors. 55 References in this recommendation to communicating and interacting with security holders include, where securities are held by a custodian or nominee, communicating and interacting with the beneficial owner of the securities. 56 Section 250S of the Corporations Act. 57 This recommendation does not apply to procedural resolutions. Whether a poll is called on a procedural resolution is generally a matter for the chair of the meeting. Where significant comments or concerns are raised by investors or their representatives, they should be conveyed to the entity’s board and relevant senior executives. Recommendation 6.3 A listed entity should disclose how it facilitates and encourages participation at meetings of security holders. Commentary Meetings of security holders are an important forum for two-way communication between a listed entity and its security holders. They provide an opportunity for a listed entity to impart to security holders a greater understanding of its business, governance, financial performance and prospects, as well as to discuss areas of concern or interest to the board and management. They also provide an opportunity for security holders to express their views to the entity’s board and management about any areas of concern or interest for them. The Council would encourage listed entities with large or geographically diverse registers to consider how technology can be used to facilitate the participation of security holders in meetings. This may include, for example, live webcasting of meetings so that security holders can view and hear proceedings online, holding meetings across multiple venues linked by live telecommunications, and hybrid meetings that allow shareholders to attend and vote in person, by proxy or online. All listed entities that have an AGM should afford security holders who are not able to attend the meeting and exercise their right to ask questions about, or make comments on, the management of the entity, 56 the opportunity to provide questions or comments ahead of the meeting. Where appropriate, these questions and comments should be addressed at the meeting, either by being read out and then responded to at the meeting or by providing a transcript of the question or comment and a written response at the meeting. Recommendation 6.4 A listed entity should ensure that all substantive 57 resolutions at a meeting of security holders are decided by a poll rather than by a show of hands. Commentary The principle of “one security one vote” is enshrined in the listing rules. Deciding votes of security holders on the basis of a show of hands, regardless of the number of securities held, is inconsistent with this principle. 25 / Corporate Governance Principles and Recommendations 4th Edition 2019 It is the responsibility of the person chairing a meeting of security holders to ascertain the true will of the security holders attending and voting at the meeting, whether they attend in person, electronically or by proxy or other representative. In most situations, this can only be achieved with certainty by conducting a poll. Recommendation 6.5 A listed entity should give security holders the option to receive communications from, and send communications to, the entity and its security registry electronically. Commentary Most security holders appreciate the speed, convenience and environmental friendliness of electronic communications, compared with more traditional methods of communication. Listed entities should provide security holders with the option to receive communications from, and send communications to, the entity and its security registry electronically. Communications to security holders from the entity or its security registry should be formatted to be easily readable on a computer screen and other electronic devices commonly used for that purpose and include a printer-friendly option for those security holders who wish to retain a hard copy of the communication. ASX Corporate Governance Council / 26 Principle 7 / Recognise and manage risk A listed entity should establish a sound risk management framework and periodically review the effectiveness of that framework. Recommendation 7.1 The board of a listed entity should: (a) have a committee or committees to oversee risk, 58 each of which: (1) has at least three members, a majority of whom are independent directors; and (2) is chaired by an independent director, and disclose: (3) the charter of the committee; (4) the members of the committee; and (5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or (b) if it does not have a risk committee or committees that satisfy (a) above, disclose that fact and the processes it employs for overseeing the entity’s risk management framework. Commentary Recognising and managing risk is a crucial part of the role of the board and management. While ultimate responsibility for a listed entity’s risk management framework rests with the full board, having a risk committee (be it a stand-alone risk committee, a combined audit and risk committee or a combination of board committees addressing different elements of risk) can be an efficient and effective mechanism to bring the transparency, focus and independent judgement needed to oversee the entity’s risk management framework. 58 The risk committee(s) could be a stand-alone risk committee, a combined audit and risk committee or a combination of board committees addressing different elements of risk. Where it is a combination of committees, the listed entity should disclose how it has divided the responsibility for overseeing risk between those different committees. The role of a risk committee is usually to: • monitor management’s performance against the entity’s risk management framework, including whether it is operating within the risk appetite set by the board; • review any material incident involving fraud or a break- down of the entity’s risk controls and the “lessons learned”; • receive reports from internal audit on its reviews of the adequacy of the entity’s processes for managing risk; • receive reports from management on new and emerging sources of risk and the risk controls and mitigation measures that management has put in place to deal with those risks; • make recommendations to the board in relation to changes that should be made to the entity’s risk management framework or to the risk appetite set by the board; and • oversee the entity’s insurance program, having regard to the entity’s business and the insurable risks associated with its business. A risk committee should have a charter that clearly sets out its role and confers on it all necessary powers to perform that role. This will usually include the right to obtain information, interview management and internal and external auditors (with or without management present), and seek advice from external consultants or specialists where the committee considers that necessary or appropriate. A risk committee should be of sufficient size and independence, and its members between them should have the necessary technical knowledge and a sufficient understanding of the industry in which the entity operates, to be able to discharge the committee’s mandate effectively. The boards of some listed entities may decide that they are able to oversee the entity’s risk management framework efficiently and effectively without establishing a risk committee. If they do, the entity should disclose in its annual report or on its website the fact that it does not have a risk committee and explain the processes it employs for overseeing the entity’s risk management framework. 27 / Corporate Governance Principles and Recommendations 4th Edition 2019 Recommendation 7.2 The board or a committee of the board 59 should: (a) review the entity’s risk management framework at least annually to satisfy itself that it continues to be sound and that the entity is operating with due regard to the risk appetite set by the board; and (b) disclose, in relation to each reporting period, whether such a review has taken place. Commentary One of the key roles of the board of a listed entity is to monitor the adequacy of the entity’s risk management framework and satisfy itself that the entity is operating with due regard to the risk appetite set by the board. This includes satisfying itself that the risk management framework deals adequately with contemporary and emerging risks such as conduct risk, 60 digital disruption, cyber-security, privacy and data breaches, sustainability and climate change. The Council acknowledges that from time to time circumstances may dictate that an entity needs to operate outside of the current risk appetite set by the board. Where that occurs, the matter should be brought to the attention of the board. Recommendation 7.3 A listed entity should disclose: (a) if it has an internal audit function, how the function is structured and what role it performs; or (b) if it does not have an internal audit function, that fact and the processes it employs for evaluating and continually improving the effectiveness of its governance, risk management and internal control processes. 59 If the board decides to delegate this role to a committee of the board, this should be reflected in the charter of the committee in question. 60 As stated in the report of APRA’s Prudential Inquiry into the Commonwealth Bank of Australia at page 7: “Conduct risk is ‘the risk of inappropriate, unethical or unlawful behaviour on the part of an organisation’s management or employees.’ At its simplest, conduct risk management goes beyond what is strictly allowed under law and regulation (‘can we do it?’) to consider whether an action is appropriate or ethical (‘should we do it?’).” 61 For the avoidance of doubt, despite the word “internal”, a listed entity may outsource the internal audit function (for example, to a professional services firm). 62 Listed entities that have or wish to have an internal audit function may find the International Standards for the Professional Practice of Internal Auditing published by the International Internal Audit Standards Board helpful in understanding how that function should perform. 63 “Material exposure” in this context means a real possibility that the risk in question could materially impact the listed entity’s ability to create or preserve value for security holders over the short, medium or longer term. 64 The terms “environmental risks” and “social risks” are defined in the glossary. 65 See, for example, the joint publication by the Australian Council of Superannuation Investors and the Financial Services Council entitled 2015 ESG Reporting Guide for Australian Companies , available online at: www.acsi.org.au/images/stories/ACSIDocuments/ESG_Reporting_Guide_Final_2015_single_page.pdf. 66 See note 49 above. 67 Such as: • the Global Reporting Initiative’s standards, available online at: www.globalreporting.org/standards/gri-standards-download-center/; • the various sustainability accounting standards published by the Sustainability Accounting Standards Board, accessible online from www.sasb.org/; or • the Climate Disclosure Standards Board’s Framework for reporting environmental and natural capital , available online at: www.cdsb.net/sites/cdsbnet/files/cdsb_framework_for_reporting_environmental_information_natural_capital.pdf. Commentary An internal audit function 61 can assist a listed entity to accomplish its objectives by bringing a systematic, disciplined approach to evaluating and continually improving the effectiveness of its risk management and internal control processes. If a listed entity has an internal audit function, 62 the head of that function should be suitably qualified and have a direct reporting line to the board or to the board audit committee to bring the requisite degree of skill, independence and objectivity to the role. If a listed entity does not have an internal audit function, the board or audit committee should review periodically whether there is a need for such a function. Recommendation 7.4 A listed entity should disclose whether it has any material exposure 63 to environmental or social risks 64 and, if it does, how it manages or intends to manage those risks. Commentary How an entity manages environmental and social risks can affect its ability to create long-term value for security holders. Accordingly, investors increasingly are calling for greater transparency on the environmental and social risks faced by listed entities, 65 so that they in turn can properly assess the risk of investing in those entities. To make the disclosures called for under this recommendation does not require a listed entity to publish an “integrated report” or “sustainability report”. However an entity that does publish an integrated report in accordance with the International Integrated Reporting Council’s International Framework, 66 or a sustainability report in accordance with a recognised international standard, 67 may meet this recommendation simply by cross-referring to that report. ASX Corporate Governance Council / 28 The Council would encourage entities that believe they do not have any material exposure to environmental or social risks to consider carefully their basis for that belief and to benchmark their disclosures in this regard against those made by their peers. One particular source of environmental risk relates to climate change. 68 This includes: • risks related to the transition to a lower-carbon economy, including policy and legal risks, technology risk, market risk and reputation risk; and • physical risks, such as changes in water availability, sourcing, and quality; food security; and extreme temperature changes affecting an organisation’s premises, operations, supply chains, transport needs, and employee safety. Many listed entities will be exposed to these types of risks, even where they are not directly involved in mining or consuming fossil fuels. The Council would encourage entities to consider whether they have a material exposure to climate change risk by reference to the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (“TCFD”) 69 and, if they do, to consider making the disclosures recommended by the TCFD. 68 See the report from Senate Economics References Committee dated April 2017 entitled Carbon risk: a burning issue , available online at: www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Carbonriskdisclosure45/~/media/Committees/economics_ctte/Carbonriskdisclosure45/report.pdf. 69 The TCFD is an industry-led task force set up to develop voluntary, consistent climate-related financial disclosures useful to investors, lenders and insurance underwriters in assessing and pricing climate-related risks and opportunities. The TCFD’s recommendations and related materials are available online at: www.fsb-tcfd.org/publications/. Listed entities can find useful resources on climate change risk at the TCFD Knowledge Hub at: www.tcfdhub.org/. 29 / Corporate Governance Principles and Recommendations 4th Edition 2019 Principle 8 / Remunerate fairly and responsibly A listed entity should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract, retain and motivate high quality senior executives and to align their interests with the creation of value for security holders and with the entity’s values and risk appetite. Recommendation 8.1 The board of a listed entity should: (a) have a remuneration committee 70 which: (1) has at least three members, a majority of whom are independent directors; and (2) is chaired by an independent director, and disclose: (3) the charter of the committee; (4) the members of the committee; and (5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or (b) if it does not have a remuneration committee, disclose that fact and the processes it employs for setting the level and composition of remuneration for directors and senior executives and ensuring that such remuneration is appropriate and not excessive. Commentary Remuneration is a key driver of culture 71 and a key focus for investors. When setting the level and composition of remuneration, a listed entity needs to balance: 70 It should be noted that a listed entity which is included in the S&P/ASX 300 Index at the beginning of its financial year is required under listing rule 12.8 to have a remuneration committee comprised solely of non-executive directors for the entire duration of that financial year. 71 As noted by Commissioner Hayne in the Interim Report, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry 28 September 2018, Volume 1, at page 55: “… staff and others engaged by an entity will treat as important what they believe that the entity values. Rewarding volume and amount of sales is the clearest signal that selling is what the entity values. What staff and others believe that the entity values informs what they do. It is a critical element in forming the culture of the entity.” 72 The individual remuneration packages to be awarded to employees other than senior executives are generally matters left to management. 73 Listed companies established in Australia should note the provisions in sections 206K-206M of the Corporations Act regarding the engagement of remuneration consultants to advise on the remuneration packages to be awarded to key management personnel. • its desire to attract and retain high quality directors and to attract, retain and motivate senior executives; • the need to ensure that the incentives for executive directors and other senior executives encourage them to pursue the growth and success of the entity without rewarding conduct that is contrary to the entity’s values or risk appetite; • the need to ensure that the incentives for non-executive directors do not conflict with their obligation to bring an independent judgement to matters before the board; • the implications for its reputation and standing in the community if it is seen to pay excessive remuneration to directors and senior executives; and • its commercial interest in controlling expenses. A listed entity should have a formal, rigorous and transparent process for developing its remuneration policy and for fixing the remuneration packages of directors and senior executives. Having a separate remuneration committee can be an efficient and effective mechanism to bring the focus and independent judgement needed on remuneration decisions. The role of the remuneration committee is usually to review and make recommendations to the board in relation to: • the entity’s remuneration framework for directors, including the process by which any pool of directors’ fees approved by security holders is allocated to directors; • the remuneration packages to be awarded to senior executives; 72 • equity-based remuneration plans for senior executives and other employees; • superannuation arrangements for directors, senior executives and other employees; and • whether there is any gender or other inappropriate bias in remuneration for directors, senior executives or other employees. The remuneration committee should have a charter that clearly sets out its role and confers on it all necessary powers to perform that role. This will usually include the right to obtain information, interview management, and seek advice from external consultants or specialists where the committee considers that necessary or appropriate. 73 ASX Corporate Governance Council / 30 The remuneration committee should be of sufficient size and independence to discharge its mandate effectively. If the remuneration committee includes an executive director, they should not be involved in deciding their own remuneration. The committee should also be alive to the potential conflict of interest in an executive director being involved in setting the remuneration for other executives that may indirectly affect their own (for example, through setting a benchmark or because of relativities). The boards of some listed entities may decide that they are able to deal efficiently and effectively with remuneration issues without establishing a separate remuneration committee. If they do, the entity should disclose in its annual report or on its website the fact that it does not have a remuneration committee and explain the processes it employs for setting the level and composition of remuneration for directors and senior executives and ensuring that such remuneration is appropriate and not excessive. Regardless of whether there is a remuneration committee, no individual director or senior executive should be involved in deciding his or her own remuneration. 74 Recommendation 8.2 A listed entity should separately disclose its policies and practices regarding the remuneration of non-executive directors and the remuneration of executive directors and other senior executives. Commentary A listed entity’s remuneration policies and practices should appropriately reflect the different roles and responsibilities of non-executive directors compared with executive directors and other senior executives. In this regard, listed entities may find the guidelines in Box 8.2 on page 31 useful in formulating their remuneration policies and practices. The disclosures regarding the remuneration of executive directors and other senior executives should include a summary of the entity’s policies and practices regarding the deferral of performance-based remuneration and the reduction, cancellation or clawback of performance-based remuneration in the event of serious misconduct or a material misstatement in the entity’s financial statements. 74 This statement is not intended to apply to a determination by the board of a listed entity on how the pool of directors’ fees approved by security holders should be split between directors. 75 Listing rule 10.14. Note that this requirement does not apply to securities purchased on-market under the terms of a scheme that provides for purchases of securities by or on behalf of employees or directors (listing rule 10.16). 76 Under section 211 of the Corporations Act, benefits that are “reasonable remuneration” are an exception to the requirement for member approval for financial benefits to related parties under section 208 of the Act. 77 Assuming it has sufficient headroom to issue securities without security holder approval under listing rules 7.1 and 7.1A. If it does not, then the employee incentive scheme will require security holder approval under listing rule 7.2 exception 13. 78 If renewed every 3 years, it will also result in any issues of securities under the scheme not eating into the entity’s placement capacity under listing rules 7.1 and 7.1A (listing rule 7.2 exception 13). 79 It should be noted that section 206J of the Corporations Act prohibits the key management personnel of an ASX listed company established in Australia, or a closely related party of such personnel, from entering into an arrangement that would have the effect of limiting their exposure to risk relating to an element of their remuneration that either has not vested or has vested but remains subject to a holding lock. The disclosures regarding the remuneration of non-executive directors should include a summary of the entity’s policies and practices regarding any minimum shareholding (“skin in the game”) requirements for those directors. Under the listing rules, a listed entity is required to obtain security holder approval for the issue of securities to directors or their associates under any equity-based incentive scheme. 75 A listed entity is not required under the Corporations Act 76 or the listing rules 77 to obtain security holder approval for an equity-based incentive scheme involving the issue of securities to senior executives or other employees who are not directors. Notwithstanding this, a listed entity may find it useful to submit to security holders any proposed equity-based incentive scheme which will involve the issue of securities to senior executives or other employees prior to implementing it. This will provide the board with a timely assurance that the scheme is reasonable and acceptable to security holders. 78 Recommendation 8.3 A listed entity which has an equity-based remuneration scheme should: (a) have a policy on whether participants are permitted to enter into transactions (whether through the use of derivatives or otherwise) which limit the economic risk of participating in the scheme; 79 and (b) disclose that policy or a summary of it. Commentary Allowing participants in an equity-based remuneration scheme to hedge or otherwise limit the economic risk of participating in the scheme may act counter to the aims of the scheme and blur the relationship between remuneration and performance. A listed entity which has an equity-based remuneration scheme should establish a policy on whether participants can enter into these sorts of transactions and disclose that policy to investors. This applies whether the participants in the scheme are directors, senior executives or other employees. 31 / Corporate Governance Principles and Recommendations 4th Edition 2019 8081 80 Note that an issue of securities to a director will require security holder approval under listing rule 10.11 unless it falls within the exceptions set out in listing rule 10.12. 81 Note also the restrictions that apply under sections 200-200J of the Corporations Act to termination payments by companies incorporated in Australia (and their associates) to those who hold a managerial or executive office in the company or in a related body corporate. Box 8.2 / Suggested guidelines for: Executive remuneration Non-executive director remuneration Composition: remuneration packages for executive directors and other senior executives should include an appropriate balance of fixed remuneration and performance-based remuneration. Composition: non-executive directors should be remunerated by way of cash fees, superannuation contributions and non-cash benefits in lieu of fees (such as salary sacrifice into superannuation or equity). Fixed remuneration: should be reasonable and fair, taking into account the entity’s obligations at law and labour market conditions, and should be relative to the scale of the entity’s business. It should reflect core performance requirements and expectations. Fixed remuneration: levels of fixed remuneration for non-executive directors should reflect the time commitment and responsibilities of the role. Performance-based remuneration: should be linked to clearly specified performance targets. These targets should be aligned to the entity’s short, medium and longer term performance objectives and should be consistent with its circumstances, purpose, strategic goals, values and risk appetite. Discretion should be retained, where appropriate, to prevent performance-based remuneration rewarding conduct that is contrary to the entity’s values or risk appetite. Performance-based remuneration: non- executive directors should not receive performance-based remuneration as it may lead to bias in their decision-making and compromise their objectivity. Equity-based remuneration: well-designed equity-based remuneration, including options or performance rights, can be an effective form of remuneration, especially when linked to hurdles that are aligned to the entity’s short, medium and longer-term performance objectives. Care needs to be taken in the design of equity-based remuneration schemes, however, to ensure that they do not lead to “short-termism” on the part of senior executives or the taking of undue risks. Equity-based remuneration: it is generally acceptable for non-executive directors to receive securities as part of their remuneration to align their interests with the interests of other security holders. 80 However, non- executive directors generally should not receive options with performance hurdles attached or performance rights as part of their remuneration as it may lead to bias in their decision-making and compromise their objectivity. Termination payments: termination payments, if any, for senior executives should be agreed in advance and the agreement should clearly address what will happen in the case of early termination. 81 There should be no payment for removal for misconduct. Termination payments: non-executive directors should not be provided with retirement benefits other than superannuation. ASX Corporate Governance Council / 32 Additional recommendations that apply only in certain cases The following additional recommendations apply to the entities described within them. Recommendation 9.1 A listed entity with a director who does not speak the language in which board or security holder meetings are held or key corporate documents 82 are written should disclose the processes it has in place to ensure the director understands and can contribute to the discussions at those meetings and understands and can discharge their obligations in relation to those documents. Commentary This recommendation could apply to an entity established in Australia that conducts its board meetings in a language other than English 83 and has a director who does not speak that language. It could also apply to an entity established outside Australia that holds its meetings and prepares key documents in a language other than English and has a director who does not speak that language. It could further apply to an entity established in Australia or elsewhere that holds meetings or prepares key documents in English and has a director who does not speak English. Recommendation 9.2 A listed entity established outside Australia should ensure that meetings of security holders are held at a reasonable place and time. Commentary Australian listed entities are required under the Corporations Act 84 to hold meetings of security holders at a reasonable place and time. Listed entities established outside Australia should do likewise. 82 “Key corporate documents” include an entity’s constitution, prospectus, PDS, corporate reports and continuous disclosure announcements. 83 For example, because the chair or other directors are more comfortable speaking that language rather than English. 84 Section 249R (listed companies) and section 252P (listed trusts). 85 Sections 250PA, 250RA and 250T. Recommendation 9.3 A listed entity established outside Australia, and an externally managed listed entity that has an AGM, should ensure that its external auditor attends its AGM and is available to answer questions from security holders relevant to the audit. Commentary The opportunity for security holders to question a listed entity’s external auditor at the AGM is an important safeguard for the integrity of the corporate reporting process. That opportunity is afforded to security holders in listed companies established in Australia by provisions in the Corporations Act. 85 These Corporations Act provisions do not apply to listed entities established outside Australia. Listed trusts established in Australia as registered managed investment schemes are not required by the Corporations Act to have an AGM and, even if they do, they also are not subject to these Corporations Act provisions. Despite this, a listed entity established outside Australia, and an externally managed listed entity that has an AGM, should ensure that its external auditor attends its AGM and is available to answer questions from security holders relevant to the audit. 33 / Corporate Governance Principles and Recommendations 4th Edition 2019 The application of the recommendations to externally managed listed entities As noted previously, some recommendations require modification when applied to externally managed listed entities. 86 Investors in an externally managed listed entity generally invest in the listed entity on the basis of the management expertise of the responsible entity. In that context, an appropriate line needs to be drawn between corporate governance matters affecting the responsible entity, which will primarily be a concern for the board and security holders of the responsible entity, and corporate governance matters affecting the listed entity. Recommendations that apply to externally managed listed entities Recommendations 2.3, 3.1, 3.2, 3.3, 3.4, 4.1, 4.2, 4.3, 5.1, 5.2, 5.3, 6.1, 6.2, 6.3, 6.4, 6.5, 7.1, 7.2, 7.3 and 7.4 apply to an externally managed listed entity. Recommendation 9.3 will also apply to an externally managed listed entity that has an AGM. The disclosures in relation to recommendations 2.3 (disclosure of independent directors), 3.1 (values), 3.2 (code of conduct), 3.3 (whistleblower policy) and 3.4 (anti-bribery and corruption policy) should be made in relation to the responsible entity in its corporate capacity. In the case of recommendation 2.3, independence should be assessed and disclosed vis-à-vis the responsible entity rather than the listed entity. The disclosures in relation to recommendations 5.1 (disclosure policy), 5.2 (copies of announcements to board), 5.3 (investor and analyst presentations), 6.3 (facilitate participation at meetings of security holders), 6.4 (vote by poll rather than show of hands), 6.5 (electronic communications) and 7.4 (environmental and social risks) should be made in relation to the listed entity being managed by the responsible entity. The disclosures in relation to recommendations 4.1 (audit committee), 4.2 (CEO and CFO certification of financial statements), 4.3 (verification of corporate reports), 6.1 (website disclosures), 6.2 (investor relations), 7.1 (risk committee), 7.2 (annual risk review) and 7.3 (internal audit) should be made in relation to the specific processes and facilities the responsible entity has put in place to perform its role as the manager of the listed entity. 86 “Externally managed listed entity” is defined in the glossary. 87 Under section 601JA(1) of the Corporations Act, the responsible entity of a registered managed investment scheme is required to establish a compliance committee if less than half of the directors of the responsible entity are “external directors” (as defined in section 601JA(2) of that Act). 88 See section 912A(1)(h) of the Corporations Act. In relation to recommendations 4.1 (audit committee) and 7.1 (risk committee), if the entity is a listed trust with a compliance committee, 87 the board of the responsible entity may instead of establishing a separate audit or risk committee, adapt the role of the compliance committee to cover the responsibilities that would ordinarily be undertaken by the audit or risk committee. If it does so, it should make the disclosures mentioned in recommendations 4.1(a) and 7.1(a) in relation to the compliance committee. In addressing recommendation 7.2 (annual risk review), the board of the responsible entity should have regard to the guidance given by ASIC about the obligation 88 of a responsible entity to maintain adequate risk management systems in Regulatory Guide 259 Risk management systems of responsible entities. Recommendations that do not apply to externally managed listed entities Recommendations 1.1, 1.2, 1.3, 1.4, 1.5, 1.6, 1.7, 2.1, 2.2, 2.4, 2.5, 2.6, 8.1, 8.2, 8.3, 9.1 and 9.2 do not apply to an externally managed listed entity. The entity may simply state that these recommendations are “not applicable” in its corporate governance statement. Additional disclosures that an externally managed listed entity should make In lieu of recommendation 1.1, an externally managed listed entity should instead comply with the following alternative recommendation: Alternative to recommendation 1.1 for externally managed listed entities: The responsible entity of an externally managed listed entity should disclose: (a) the arrangements between the responsible entity and the listed entity for managing the affairs of the listed entity; and (b) the role and responsibility of the board of the responsible entity for overseeing those arrangements. ASX Corporate Governance Council / 34 Commentary In the case of an externally managed listed entity, the performance of the responsible entity will usually drive the performance of the listed entity. It is important that investors in the entity understand the arrangements between the responsible entity and the listed entity for managing the affairs of the listed entity and also the role and responsibility of the board of the responsible entity for overseeing those arrangements. In addressing this alternative recommendation, the responsible entity should disclose the extent to which the responsible entity has outsourced any material aspects of the management of the listed entity and how the responsible entity oversees the performance of the outsourced service provider. 89 In lieu of recommendations 8.1, 8.2 and 8.3, an externally managed listed entity should instead comply with the following alternative recommendation: Alternative to recommendations 8.1, 8.2 and 8.3 for externally managed listed entities: An externally managed listed entity should clearly disclose the terms governing the remuneration of the manager. Commentary The management fees (including performance-related fees) payable by an externally managed listed entity to its manager are a key focus for investors. Investors should be able to easily locate a summary of the amount and composition of those fees. Simply including a copy of the entity’s constitution (if that is the relevant document which governs the calculation and payment of management fees) or management agreement on the entity’s website is not sufficient for this purpose. There should be a clear and concise summary of the fees payable to the manager on the entity’s website, as well as a cross- reference to the specific clause or clauses in the relevant document setting out those fees where investors can go for further details. 89 Noting that the entity will generally be liable for any acts or omissions committed by the outsourced service provider under section 601FB of the Corporations Act. 35 / Corporate Governance Principles and Recommendations 4th Edition 2019 AGM: the annual general meeting of security holders. ASX: ASX Limited. board: in the case of an internally managed listed entity, the directors of the entity acting as a board and, in the case of an externally managed listed entity, the directors of the responsible entity acting as a board. CEO: in the case of an internally managed listed entity, the chief executive officer of the entity (by whatever title called) and, in the case of an externally managed listed entity, the chief executive officer of the responsible entity (by whatever title called). CFO: in the case of an internally managed listed entity, the chief financial officer of the entity (by whatever title called) and, in the case of an externally managed listed entity, the chief financial officer of the responsible entity (by whatever title called). commentary: the discussion headed “Commentary” that follows a recommendation. The commentary does not form part of a recommendation and does not give rise to a reporting obligation. corporate governance statement the statement made by a listed entity under listing rule 4.10.3 stating the extent to which it has followed the Council’s recommendations. Corporations Act: the Corporations Act 2001 (Cth). director: in the case of an internally managed listed entity, a director of the entity and, in the case of an externally managed listed entity, a director of the responsible entity. disclose: when used in a recommendation, means to include the information in the entity’s annual report or on its website. employee incentive scheme: the same meaning as in the listing rules but does not include a contribution or salary sacrifice plan where a director acquires securities in the entity at their market value. environmental risks: the potential negative consequences (including systemic risks and the risk of consequential regulatory responses) to a listed entity if its activities adversely affect the natural environment or if its activities are adversely affected by changes in the natural environment. This includes the risks associated with the entity polluting or degrading the environment, adding to the carbon levels in the atmosphere, or threatening a region’s biodiversity or cultural heritage. It also includes the risks for the entity associated with climate change, reduced air quality and water scarcity. executive director: in the case of an internally managed listed entity, a director of the entity who is also an executive of the listed entity or a child entity and, in the case of an externally managed listed entity, a director of the responsible entity who is also an executive of the responsible entity or a related body corporate. externally managed listed entity: a listed trust or stapled structure that is managed by an external responsible entity. independent director: a director who is free of any interest, position or relationship that might influence, or reasonably be perceived to influence, in a material respect their capacity to bring an independent judgement to bear on issues before the board and to act in the best interests of the entity as a whole rather than those of an individual security holder or other party. internally managed listed entity: a listed entity that is not an externally managed listed entity (this includes a listed company and a listed trust or stapled structure that has an internal responsible entity). listed entity: an entity admitted to the official list of ASX as an ASX Listing. The term does not extend to entities admitted to the official list of ASX as an ASX Debt Listing or as an ASX Foreign Exempt Listing (these entities are not subject to listing rule 4.10.3). listing rule: an ASX listing rule. non-executive director: a director who is not an executive director. periodic corporate report: an entity’s annual directors’ report, annual and half yearly financial statements, quarterly activity report, quarterly cash flow report, integrated report, sustainability report, or similar periodic report prepared for the benefit of investors. principle: one of the 8 enumerated principles in this document. recommendation: one of the 35 general and 3 additional enumerated recommendations in this document. reporting period: the financial period covered by an entity’s annual report. responsible entity: the entity responsible for managing an externally managed listed entity. security holders: in the case of a listed company means shareholders and in the case of a listed trust means unitholders. Glossary ASX Corporate Governance Council / 36 senior executive: • in the case of an internally managed listed entity: – except in recommendation 1.5(c)(3)(A), an executive who is a member of the key management personnel of the entity, including an executive director but not including a non-executive director; and – in recommendation 1.5(c)(3)(A), the listed entity should define what it means by “senior executive”; or • in the case of an externally managed listed entity, an executive who is a member of the key management personnel of the responsible entity, including an executive director but not including a non-executive director. senior independent director: an independent director nominated to perform this role. social risks: the potential negative consequences (including systemic risks and the risk of consequential regulatory responses) to a listed entity if its activities adversely affect human society or if its activities are adversely affected by changes in human society. This includes the risks associated with the entity or its suppliers engaging in modern slavery, aiding human conflict, facilitating crime or corruption, mistreating employees, customers or suppliers, or harming the local community. It also includes the risks for the entity associated with large scale mass migration, pandemics or shortages of food, water or shelter. substantial holder: • in relation to a listed entity that is an Australian company or registered managed investment scheme, a person who has a “substantial holding” in the listed entity under paragraph (a) of the definition of that term in section 9 of the Corporations Act; • in relation to a listed company that is not an Australian company, a person who would have a “substantial holding” in the company under paragraph (a) of the definition of “substantial holder” in section 9 of the Corporations Act if the references in that paragraph to a company and its securities were references to the foreign company and its securities; and • in relation to a listed trust which is not a registered managed investment scheme or which is a foreign trust, a person who would have a “substantial holding” in the trust under paragraph (a) of the definition of that term in section 9 of the Corporations Act if the references in that paragraph to a scheme and interests in the scheme were references to the trust and units in the trust. Workplace Gender Equality Act: the Workplace Gender Equality Act 2012 (Cth). © Copyright 2019 ASX Corporate Governance Council. Association of Superannuation Funds of Australia, ACN 002 786 290, Australian Council of Superannuation Investors, Australian Institute of Company Directors ACN 008 484 197, Australian Institute of Superannuation Trustees ACN 123 284 275, Australasian Investor Relations Association ACN 095 554 153, Australian Shareholders’ Association ACN 000 625 669, ASX ABN 98 008 624 691, Business Council of Australia ACN 008 483 216, CPA Australia ACN 008 392 452, Financial Services Council ACN 080 744 163, Financial Services Institute of Australasia ACN 066 027 389, Governance Institute of Australia ACN 008 615 950, Group of 100, Institute of Public Accountants ACN 004 130 643, Chartered Accountants Australia and New Zealand ABN 50 084 642 571. The Institute of Internal Auditors – Australia ACN 001 797 557, Law Council of Australia ACN 005 260 622, Property Council of Australia ACN 008 474 422, Stockbrokers and Financial Advisers Association ABN 91 089 767 706. All rights reserved 2019. ASX Corporate Governance Council FINANCIALSER VICE S C OUNCIL
Students will work in Groups of 3 as assigned to the specific paper in a topic. My paper is Examining distinct carbon cost structures and climate change abatement strategies in CO2 polluting firms. Us
Examining distinct carbon cost structures and climate change abatement strategies in CO 2 polluting firms Simon Cadez Department of Accounting and Auditing, University of Ljubljana, Ljubljana, Slovenia, and Chris Guilding Griffith Business School, Griffith University, Gold Coast, Australia Abstract Purpose–A management accounting perspective that underscores a quest for reducing conventionally appraised costs, negative output costs as well as heightened eco-efficiency has been used in pursuit of the study’s two main study objectives. The purpose of this paper is twofold: first, the study seeks to further understanding of the relationship between product output volume, carbon costs, and CO 2emission volume in carbon-intensive firms. Second, it identifies factors affecting climate change abatement strategies pursued by these firms. Heightening appreciation of the climate change challenge, combined with minimal CO 2emission research undertaken from a cost management perspective, underscores the significance of the study. Design/methodology/approach–A triangulation of quantitative and qualitative data collected from Slovenian firms that operate in the European Union Emissions Trading Scheme has been deployed. Findings–CO 2polluting firms exhibit differing carbon cost structures that result from distinctive drivers of carbon consumption (product output vs capacity level). Climate change abatement strategies also differ across carbon-intensive sectors (energy, manufacturing firms transforming non-fossil carbon-based materials, and other manufacturing firms) but are relatively homogeneous within them. Practical implications–From a managerial perspective, the study demonstrates that carbon efficiency improvements are generally not effective in triggering corporate CO 2emission reduction when firms pursue a growth strategy. Social implications–Global warming signifies that CO 2emissions constitute a social problem. The study has the potential to raise societal awareness that the causality of the manufacturing sector’sCO 2emissions is complex. Further, the study highlights that while more efficient use of environmental resources is a prerequisite of enhanced ecological sustainability, in isolation it fails to signify improved ecological sustainability in manufacturing operations. Originality/value–The paper has high originality as it reports one of the first management accounting studies to explore the distinction between combustion- and process-related CO 2emissions. In addition, it provides distinctive support for the view that eco-efficiency is more consistent with the economic than the environmental pillar of sustainability. KeywordsSustainability, Climate change, Eco-efficiency, Carbon intensity, Carbon efficiency, Cost drivers Paper typeResearch paper 1. Introduction A key characteristic of polluting firms concerns their dual output. As a by-product of producing“planned for”products and services, most firms also produce undesirable outputs. The planned for products or services (e.g. electricity, heat, cement, and steel) can be termed a“positive output”, and undesirable by-products, such as CO 2emissions that have a degrading impact on the environment (Karl and Trenberth, 2003), can be termed a “negative output”(Burnett and Hansen, 2008; Tyteca, 1996). Since halting the growing environmental, social, and economic threats associated with global warming (Stern, 2007) will require a significant (and rapid) reduction of total CO 2 emissions (Meinshausenet al., 2009; Ramanathan and Feng, 2008), regulatory intervention Accounting, Auditing & Accountability Journal Vol. 30 No. 5, 2017 pp. 1041-1064 © Emerald Publishing Limited 0951-3574 DOI 10.1108/AAAJ-03-2015-2009 The current issue and full text archive of this journal is available on Emerald Insight at: www.emeraldinsight.com/0951-3574.htm 1041 Carbon cost structures consistent with this objective is rising worldwide (Cook, 2009; McNicholas and Windsor, 2011). While many countries have introduced some form of carbon tax (Andrewet al., 2010), there is also an increasing international interest in the introduction of emissions trading initiatives that particularly target large CO 2emitting sectors (Braun, 2009). Such carbon regulation is defining a new role for managers and management accountants. In addition to their traditional cost and revenue management analytical domains, they are now increasingly called upon to allocate resources using algorithms that recognise complex climate change issues (Howard-Grenvilleet al., 2014; Milne and Grubnic, 2011). A quest for corporate ecological sustainability involves an appropriate alignment of strategy, structure, and management control systems (Bebbington and Thomson, 2013; Gondet al., 2012). A key sustainability focus in carbon-intensive firms (firms with a high incidence of CO 2emissions) concerns their reduction in CO 2emissions and a quest for heightened carbon efficiency (Hoffmann and Busch, 2008; Mir and Rahaman, 2007; Virtanen et al., 2013), the latter representing a particular dimension of eco-efficiency (Figge and Hahn, 2013). In light of management accountants’close involvement in seeking greater production efficiencies, their pertinence to promoting eco-efficiency appears as a natural corollary (Bouten and Hoozée, 2013; Burnett and Hansen, 2008). This corollary is underscored by eco-efficiency theory proponents who argue that an increase in ecological efficiency can trigger the double dividend of reduced costs as well as lower pollution (Al-Tuwaijriet al., 2004; Burnett and Hansen, 2008; Ferreiraet al., 2010; Figge and Hahn, 2013; Henri and Journeault, 2010; King and Lenox, 2002; Porter and van der Linde, 1995). Yet eco-efficiency, which is a form of productive efficiency, is essentially a relative concept (Figge and Hahn, 2013; Tyteca, 1996). If a firm’sCO 2emissions are largely driven by its production capacity (Banker and Johnston, 1993; Leitch, 2001), as opposed to its product output volume, increases in product output will improve productive efficiency (costs per unit) and ecological efficiency (emissions per unit of positive output) automatically, irrespective of changes in total pollution emissions. An example of production capacity representing a driver of CO 2emissions is evident in manufacturing facilities that are heated through the burning of a fossil fuel such as gas. In such situations, the larger the facility to be heated, the larger the production of CO 2emissions. While cost driver analysis has a long tradition in the accounting literature (Foster and Gupta, 1990), to our knowledge this is the first study to examine the drivers of carbon-based resource consumption and the resultant carbon costs. The main factors determining the size of a company’s carbon footprint are its product output volume, production capacity levels, and technology (Hoffmann and Busch, 2008; Milne and Grubnic, 2011). Since most businesses pursue a growth strategy (Baumet al., 2001), polluting firms confront a fundamental paradox: how to increase positive output levels while at the same time decreasing negative outputs (Arrowet al., 1995). The only way to attain both goals concurrently is through the adoption of improved technology (Tavoniet al., 2012). However, such technology is often expensive, entails long implementation lead times or is yet to be commercialised (Blanford, 2009; Pinkse and Kolk, 2010; Sandoff and Schaad, 2009). In effect, economic growth (Milne and Grubnic, 2011; Stern, 2011; York, 2012) and a lack of radical innovation to facilitate transition to a low-carbon society (Blanford, 2009; Tavoniet al., 2012) are the main reasons for the continuing rise of CO 2emissions across developed and under-developed countries (IPCC, 2014; Olivieret al., 2012). The relationship between product output, carbon costs, and CO 2emissions is not uniform across carbon-intensive firms, however. The study reported herein investigates two propositions concerning relationships between these variables. The first proposition concerns the effect of positive output volume on CO 2emission levels. The magnitude of this effect is contingent upon what constitutes the primary carbon-based resource consumption driver. When positive output volume is the main driver, carbon-related costs 1042 AAAJ 30,5 (and resulting CO 2emissions) are largely variable. Whenproductioncapacityisthemain driver, carbon-related costs (and resulting CO 2emissions) are largely fixed (Banker and Johnston, 1993; Leitch, 2001). The second proposition concerns companies’propensity to adopt distinctive CO 2 emission abatement strategies. It is proposed that such strategies are moderated by the interaction of two variables that collectively define a firm’s potential to reduce its level of CO 2emissions. The first variable is“deficiency gap”. This concerns the difference between a firm’s existing carbon intensity levels and its potential carbon intensity levels should it deploy all advanced technologies (Berroneet al., 2013). The second variable is the primary driver of carbon consumption (positive output volume vs production capacity level). Four distinct contributions to the management accounting literature arise from the study. First, following calls for an inter-disciplinary integration of technical and managerial aspects of emissions management (Bebbington and Thomson, 2013; Milne and Grubnic, 2011; Virtanenet al., 2013), the study is one of the first management accounting works to examine the distinctiveness of combustion and process-related CO 2emissions. Second, it identifies distinct carbon cost structures in CO 2polluting firms that arise from distinct drivers of carbon-based resource consumption. Third, it identifies diverse CO 2 emission abatement strategies across carbon-intensive sectors. Fourth, from a theoretical perspective, it demonstrates that eco-efficiency is a necessary, but not a sufficient, condition for reducing CO 2emission levels. The study provides support for Owen’s (2008) somewhat provocative view that eco-efficiency is more consistent with the economic than the environmental pillar of sustainability. This is because it has been found that increased production often signifies decreased emissions (and by implication, cost) per unit, whereas it rarely signifies decreased total emissions. The remainder of the paper is organised as follows. The next section overviews the study’s literary context. This is followed by a section that develops the study’s propositions. Then, the research method is described and the findings are outlined. Finally, a discussion of the study’s findings and their implications is provided in the concluding section. 2. Review of the climate change and accounting literature A long standing interest in environmental issues has been manifested in the accounting literature (Gray, 1992; Mathews, 1997). A particular interest in corporate environmental sustainability has become increasingly evident (Bebbington and Thomson, 2013; Gray, 2010; Lee and Wu, 2014; Thomsonet al., 2014; Thoradeniyaet al., 2015) and we have witnessed the coining of“sustainability accounting”as a generic term (Burritt and Schaltegger, 2010). In addition, specialist journals in the field have emerged (e.g.Sustainability Accounting, Management and Policy Journal, launched in 2010). It is somewhat paradoxical that an enhanced appreciation of sustainability issues is contemporaneous to a continuing increase, not a decline, in ecological problems (Whitemanet al., 2013). A parallel to this juxtaposition is apparent in Shrivastava’s (2010) comment:“the more I know about sustainability, the greater my eco-print grows”. A particular prerequisite for ecologically sustainable management is the embedding of sustainability within the strategic objectives of organisations and the appropriate alignment of their strategies, structures,and management controlsystems (Bebbington and Thomson, 2013; Gondet al., 2012; Hopwood, 2009). Since progress towards ecological sustainability requires functional coordination, integrated performance metrics, and shaping motivations, the accountants’skill-set appears highly pertinent to the task at hand (Burritt, 2012). Accountants’contribution has so far been modest, however (Hopwood, 2009). This appears to be for a number of reasons that include the paradigmatic distinction between emerging environmental considerations and conventional accounting practice (Burritt and Schaltegger, 2010; Hopwood, 2009), 1043 Carbon cost structures the trans-disciplinary nature of environmental problems (Burritt, 2012; Virtanenet al., 2013), complexities endemic to developingenvironmental performance measures (Cooper and Pearce, 2011; Virtanenet al., 2013), a managerial predilection towards short-term economic orientations relative to long-term sustainability outcomes (Boston and Lempp, 2011; Hartmannet al., 2013; Mir and Rahaman, 2007), as well as theoretical challenges relating to alternative conceptualisations of accounting for sustainability (Bebbington andThomson, 2013; Gray, 2010; Thomsonet al., 2014). Climate change is a key environmental issue that has been extensively addressed in this literature (Linnenlueckeet al., 2015; Milne and Grubnic, 2011). The importance of this topic is evident from the attention afforded to it by many leading accounting journals, such as the Accounting, Auditing and Accountability Journal(special issue on climate change, greenhouse gas accounting, auditing and accountability in 2011),Accounting, Organizations and Society(special issue on accounting and carbon markets in 2009), Critical Perspectives on Accounting(special issue on accounting for global warming in 2008), and theEuropean Accounting Review(special issue on accounting and the market of emissions in 2008). Climate change-related accounting is concerned primarily with CO 2emissions, which is often referred to as carbon accounting (Ascui and Lovell, 2011; Hartmannet al., 2013; Lee, 2012). Carbon accounting research is fast growing and somewhat eclectic. Most studies have been published in non-accounting journals, with a substantial proportion appearing in theJournal of Cleaner Production(Vestyet al., 2015). Since this is an inter-disciplinary journal and because the term is used extensively across different disciplines, it is unsurprising that there has been some inconsistency in the way that the term“carbon accounting”has been interpreted (Stechemesser and Guenther, 2012). Some divergency in the term’s usage is also apparent in the accounting literature (Ascui and Lovell, 2011; Bowen and Wittneben, 2011). The most prolific carbon accounting literary stream focusses on CO 2emission reporting and disclosure (Cotteret al., 2011; Cowan and Deegan, 2011; Kolket al., 2008; Liesenet al., 2015; Matsumuraet al., 2014; McNicholas and Windsor, 2011; Rankinet al., 2011; Ratnatungaet al., 2011; Solomonet al., 2011). Another significant stream of enquiry focusses on carbon markets, emission allowances, and compliance issues (Bebbington and Larrinaga-Gonzalez, 2008; Chappleet al., 2013; Cook, 2009; Engels, 2009; Lohmann, 2009; MacKenzie, 2009). Relative to these literary streams, there has been a notably scant level of environmental accounting enquiry undertaken from a management accounting perspective (Burrittet al., 2011; Hartmannet al., 2013). This appears as surprising when one recognises that decisions on carbon technology investment, pursuit of carbon efficiency optimisation, and passing on the cost of carbon regulation to consumers, all require the development of financial information for management (Ratnatunga and Balachandran, 2009). Further, the consumption of carbon-based resources signifies a direct (carbon-based resource usage) and indirect (purchasing emission allowances) financial cost to a firm (MacKenzie, 2009). The need for financial information in connection with climate change-related corporate decision making would appear to be most evident in carbon-intensive firms. This stems from the increasing pressure placed on such firms to scale back their carbon emissions, due to a growing societal view that global warming represents one of the most profound long- term challenges confronting mankind (Ramanathan and Feng, 2008). Despite the dearth of management accounting research related to climate change, some pertinent research is starting to emerge. For instance, Engels (2008) observed managers in about two-thirds of European carbon-intensive firms to be unfamiliar with the costs of reducing CO 2emissions in their company. Virtanenet al.(2013) demonstrated how technically under-developed performance indicators have impeded energy efficiency management in a Finnish petrochemicals manufacturer. Burrittet al.(2011) reported that 1044 AAAJ 30,5 leading German firms are yet to realise the potential of carbon accounting to translate physical CO 2-related information into financially denominated information. Lee (2012) observed the use of eco-control to provide quantified emission information pertinent to Korean car manufacturing firms’decision making. Relatedly, Vestyet al.(2015) observed that the quantification of the volume of gas emissions and its subsequent translation to a dollar value has further mobilised the work of managers involved with carbon-related decisions. These studies point to the potential of the management accounting perspective to provide information pertinent to climate change-related decision making. Ratnatunga and Balachandran (2009) see strategic management accounting as particularly apt for this task, due to its distinct long-term outward-looking orientation (Cadez and Guilding, 2008). It appears, however, that this potential remains largely unrealised. One management accounting perspective that can be taken on climate change concerns the promotion of more carbon efficient production processes. Carbon efficiency (or inverse indicator carbon intensity), in general, concerns minimising the ratio of carbon emissions relative to a business metric (Figge and Hahn, 2013; Hoffmann and Busch, 2008; Virtanenet al., 2013). While carbon emissions are typically measured in tons, business metrics are much more diverse, including units of production, materials usage, energy usage, sales, profit, market capitalisation, amongst other things (Hoffmann and Busch, 2008). Carbon efficiency representsa sub-theme of eco-efficiency which is concerned with optimising the volume of economic returns relative to environmental resource usage (Burnett and Hansen, 2008; Figge and Hahn, 2013). Prior research suggests that carbon-intensive firms’process efficiency improvements tend to occur in a marginal and symbolic manner (Blanford, 2009; Cadez and Czerny, 2016). These typically occur at operating levels that can be complicated by complexities such as the interdependence of different processes and an inability to control firm-level efficiency factors, such as capacity utilisation rates. Such complexities can significantly impede efforts directed to carbon-input efficiency management (Virtanenet al., 2013). Considered coordination of carbon management initiatives at the firm level appears to be critical to efforts directed to reduce worldwide CO 2emissions (Tang and Luo, 2014). Such initiatives can concern decisions relating to scale (output volume, capacity levels) and technology (Hoffmann and Busch, 2008; Milne and Grubnic, 2011). These issues are pertinent to the propositions developed in the next section. 3. Proposition development Unlike the establishment of threshold quotas, market-based instruments enable CO 2 emitting companies to seek cost-effective strategies for complying with environmental regulation by giving them the flexibility to seek a technology and output level that optimises the trade off between higher revenues from increased positive output levels and lower costs associated with reduced negative outputs resulting from decreased production levels. Key to such a strategy formulation is striking the right balance between investments in CO 2 abatement and paying for CO 2emissions (Fanet al., 2013; Sandoff and Schaad, 2009). In a regulated environment that is pursuing a reduction in total CO 2emissions through initiatives such as the European Union Emissions Trading Scheme (EU ETS), polluting firms can pursue one of three alternatives while maintaining compliance: implement new technology and/or processes consistent with reducing CO 2emissions; reduce positive output levels (and, by implication, negative output levels); or maintain the status quo and pay for their CO 2emissions. All three alternatives involve trade-offs between economic and environmental concerns. Option 1 has the potential to reduce a firm’s carbon footprint; however, it can signify a large investment outlay for the firm (Blanford, 2009). Option 2 is economically inefficient, and in some scenarios it would be detrimental from an environmental perspective. It would be detrimental if the production is merely transferred or 1045 Carbon cost structures outsourced to another country that has relatively low technology and environmental standards, as this would result in even higher total CO 2emissions for equivalent levels of output (Kuik and Hofkes, 2010). Option 3 can be costly for a firm and it is inconsistent with the overall objective of reducing a firm’s total emission levels. From an economic and environmental perspective, it would be most desirable if a cost-effective solution enabling pursuit of alternative 1, to the point where CO 2emissions are reduced to 0, can be found, as it would signify the simultaneous achievement of economic and environmental objectives (Reid and Toffel, 2009). Realisation of such a panacea currently appears to be little more than a theoretical conjecture, however. Current market, regulatory and technology conditions do not provide sufficient incentives for the type of radical innovation required (Neuhoff, 2005; Petkovaet al., 2013; Pinkse and Kolk, 2010). Determination of the options available to a firm that is interested in reducing its CO 2 emissions become particularly evident from the following functional equation that is designed to capture the determinants of CO 2emission levels: CO 2emission levels¼fQ C T ðÞ This equation is intended to depict the notion that CO 2emission levels are a function of product output volume (denoted byQ), capacity level (denoted byC) and technology (denoted byT), and that these three causal factors can interact with one another in determining CO 2emission levels. Product output volume, which is determined by a firm’s overall business strategy, determines resource consumption levels (Foster and Gupta, 1990). Carbon-based resources that release CO 2emissions into the atmosphere as they are transformed during a production process can be categorised according to two main types: fossil fuels (e.g. coal, oil, and natural gas) and other non-fossil carbon-based materials (from now on“other CBM”, e.g. limestone and iron ore). The type of carbon-based resource consumed defines the type of emission released. Combustion emissions result from burning fossil fuels due to the exothermic reaction of the fuel with oxygen. The principal source of combustion emissions is the energy-generating sector, in particular coal-fired power plants (Oliver, 2008). However, combustion emissions also occur in the manufacturing sector (e.g. a pharmaceutical company’s heating plant). Process emissions do not result directly from combustion processes, they are emissions resulting from reactions between substances, or their transformation in manufacturing, such as in the production of cement, iron and steel, lime, glass, ceramic, pulp, and paper (IPCC, 2007). A major source of process emissions is the calcination of limestone to make cement and lime (Benhelalet al., 2013; Worrellet al., 2000). For example, when calcium carbonate is heated in a kiln, it is converted to lime and carbon dioxide. The lime is combined with other materials to produce clinker (an intermediate product from which cement is made), while the carbon dioxide is released into the atmosphere (Gibbset al., 2000; Worrellet al., 2000). Unlike combustion emissions, process emissions occur mainly in the manufacturing sector. The relative magnitude of each source of CO 2emission is evident from Table I, which presents data for the EU ETS. In this context, combustion emissions represent 73 per cent of total CO 2emissions. The remaining 27 per cent are process emissions, mainly from cement and lime production, mineral-oil refining, and iron and steel production. Capacity level can also determine the volume of resource consumption (Banker and Johnston, 1993; Leitch, 2001). Cadez and Czerny (2010) analysed a large manufacturing firm that had maintained a stable level of total CO 2emissions over an extended time period that coincided with major changes in production volume, but no changes in technology. In this firm, natural gas (a fossil fuel) was used to heat its large manufacturing facilities. It was 1046 AAAJ 30,5 found in this firm that the consumption of fossil fuels was not driven by variations in output, but by production capacity. The third factor captured in the CO 2emission-level determination equation is technology. Even highly homogeneous products, such as electricity, can be produced using different technologies. These different technologies can be classified according to two main categories: traditional carbon-based technologies and low-carbon technologies (Edenhoferet al., 2009; Neuhoff, 2005). While the energy sector is still heavily reliant on traditional carbon-based technologies (e.g. coal burning), there are several low-carbon technologies (e.g. nuclear, solar, and wind) available today (Oliver, 2008). An important concept relating to technology is the deficiency gap. As already noted, the deficiency gap refers to the difference between a firm’s current carbon intensity levels and its potential carbon intensity levels, assuming the application of best available technology. This concept acknowledgesex anteheterogeneity across firms, or in other words, their different starting positions due to past managerial decisions, institutional contexts, and factors unrelated toafirm’s environmental stance, such as inertia or bad luck (Berroneet al., 2013). The deficiency gap concept is pertinent for firms operating in the traditional carbon paradigm, as well as firms operating within a low-carbon paradigm. For example, the energy sector which is still heavily reliant on low energy-value coal and out-dated boilers (Edenhoferet al., 2009), offers significant potential for emission reductions through relatively marginal improvements, such as switching fuels (e.g. natural gas instead of coal) and/or installing more efficient boilers (Oliver, 2008). The deficiency gap concept, when considered within the carbon paradigm, defines the potential to lower total CO 2emissions through more efficient use of carbon-based resources (as opposed to their complete abandonment, as in a low-carbon paradigm). This study’s first proposition concerns the effect of product output volume change on the consumption of carbon-based resources (carbon cost structure) and resultant CO 2emissions. Figure 1 depicts the driver of carbon-based resource usage (product output volume vs capacity level) as moderating the relationship between product output volume and CO 2 emission levels. Sector Installations in % Emissions in % Combustion installations a 67 73 Mineral-oil refineries 1 7 Production of iron and steel 2 6 Production of cement and lime 5 9 Manufacture of ceramic 9 1 Manufacture of pulp and paper 7 2 Other 9 2 Total 100 100 Note: aThe combustion installations sector includes installations for the public supply of heat and electricity as well as installations in various industrial sectors Source:EEA (2013, p. 21) Table I. European Union ETS sectors’installations and emissions for the 2008-2012 period Product output volume change Main driver of carbon-based resources usage (product output volume vs capacity level) Change in CO 2 emissions Figure 1. Theoretical model 1047 Carbon cost structures In some production processes the product output volume is the main driver of carbon-based resource usage. This would appear to be the case in manufacturing firms that transform other CBM. For example, if more cement is manufactured, more calcium carbonate (i.e. limestone) is transformed, which carries the by-product of more CO 2emissions (Benhelalet al., 2013; Gibbset al., 2000). Energy-generating firms that are based on the consumption of fossil fuels would appear to have a similar carbon-based cost structure (and therefore driver of CO 2emissions). An energy-generating firm that operates a coal-fired power plant requires more coal to be burned if it is to produce more electricity (Oliver, 2008). In effect, if the volume of production is the main driver of carbon-based resource consumption, carbon-related costs and resultant CO 2emissions are largely variable. As already noted, in some production processes, however, the main driver of carbon-based resource usage is production capacity, not product volume. In such cases, emissions can only be reduced significantly if entire plants or operations are closed down. For these types of operation, carbon-related costs and resulting CO 2emissions are largely fixed (within the relevant range). In many firms, both the product output volume and production capacity-level drivers of CO 2emission levels can be expected to be present. This is particularly the case in many manufacturing firms that transform other CBM, as many of these firms require also heat or electricity as a critical resource. For example, in cement manufacture, calcium carbonate is usually heated by burning fossil fuels, hence both process and combustion emissions are released in the production process (Benhelalet al., 2013; Gibbset al., 2000; Worrellet al., 2000). In effect, process emissions (and underlying carbon costs) respond to changes in product output, while most combustion emissions (and underlying carbon costs) do not. The responsiveness of total carbon costs and CO 2emissions to changes in product volume depends on the relative proportions of process and combustion emissions involved in a production process. Consistent with this discussion, we posit the following proposition: P1.Distinctive drivers of CO 2emissions signify that carbon-intensive firms can be differentially classified according to the following three sectors: energy sector (where the main CO 2emission driver is product output volume); manufacturing sector transforming other CBM (where the main CO 2emission drivers are product output volume and capacity level); and other manufacturing firms (where the main CO 2emission driver is capacity level). The second proposition concerns corporate CO 2emission abatement strategies. It is believed these strategies are affected by the interaction of two variables: the deficiency gap within the carbon paradigm; and the main driver of carbon-based resources consumption. The combustion emission deficiency gap appears to be highly variable across industry sectors (energy vs manufacturing). The energy sector has often been characterised as relatively inefficient (high combustion deficiency gap), as it continues to be highly reliant on low energy-value coal and out-dated boilers (Edenhoferet al., 2009; Oliver, 2008). The high combustion deficiency gap of this sector combined with the variable nature of its combustion emissions (driven by product output volume) suggests that this sector has the potential to realise significant carbon efficiency gains and reductions in CO 2emissions through relatively marginal improvements such as switching fuels (e.g. black coal instead of lignite) and/or installing more efficient boilers (Oliver, 2008). Accordingly, we anticipate that firms in the energy sector will have a strategic focus that emphasises the exploitation of fuel switching advances as well as seeking more efficient production infrastructure. For the manufacturing sector that transforms other CBM, both combustion and the process deficiency gap are highly pertinent. In terms of combustion, many firms in this sector already deploy the best available technology, i.e. burning natural gas in highly efficient boilers 1048 AAAJ 30,5 (Cadez and Czerny, 2010; Edenhoferet al., 2009; Markovic Hribernik and Murks, 2007), suggesting a low combustion deficiency gap. In terms of processes, Worrellet al.(2000, 2001) and Benhelalet al.(2013) explored options to lower CO 2emissions in cement and steel manufacturing processes, the two main sources of process emissions. They found that with current technology, the potential to lower process emissions per unit of positive output is fairly low, implying also a low process deficiency gap. A low process deficiency gap in combination with the variable nature of process emissions (driven by product output volume) suggests that this sector is relatively constrained both in attempts to improve carbon efficiency and total CO 2emission reduction with respect to process emissions. Furthermore, a low combustion deficiency gap in combination with the fixed posture of combustion emissions (driven by capacity level) also suggests limited potential to reduce total combustion emissions. Firms in this sector can, however, improve carbon efficiency from combustion by seeking to lower their ratio of combustion emissions per unit of positive output. Other manufacturing firms (not transforming other CBM) also exhibit a low combustion deficiency gap (Cadez and Czerny, 2010; Edenhoferet al., 2009; Markovic Hribernik and Murks, 2007). Low gap combined with the fixed nature of combustion emissions (driven by capacity level) suggests little scope for total CO 2reduction. A viable strategy is improving carbon efficiency by lowering the quotient of combustion emissions per unit of positive output. Consistent with this rationale, and aligned toP1, we conjecture that distinct CO 2 emission abatement strategies across the three carbon-intensive sectors can be summarised in the following manner: P2.Emission abatement strategies pursued in CO 2polluting firms focus on: improving carbon efficiency and reducing total CO 2emissions in energy sector firms; improving carbon efficiency (from combustion, but not processes) in manufacturing sector firms that transform other CBM; and improving carbon efficiency in other manufacturing firms. 4. Research design Quantitative and qualitative methods have been deployed to collect data that can shed light on the viability of the propositions developed. This signifies that a degree of data triangulation has been achieved. This triangulation facilitates consideration of the extent to which proposition testing using one data collection approach can be corroborated using data collected using a distinctly different approach. The main advantage of quantitative analysis is potential generalisation of conclusions across populations (Hairet al., 1998; Hsiao, 2003). This is particularly desirable in this study for, as the label implies, global warming is a global issue (Meinshausenet al., 2009). The quantitative analysis has involved an empirical examination ofP1via a panel regression analysis of archival data for Slovenian carbon-intensive firms included in the EU ETS. The period examined in this analysis is 2007-2012. The main advantage of qualitative methods is a deeper understanding of complex interactions (Eisenhardt, 1989; Hoqueet al., 2013). The qualitative phase has involved collection and analysis of interview data in six Slovenian carbon-intensive firms that are included in the EU ETS. 4.1 Data collection Quantitative archival data for product output volume were provided by the Agency of the Republic of Slovenia for Public Legal Records. Data for CO 2emissions were provided by the Agency for the Environment of the Republic of Slovenia. Although the National Allocation Plan for phase 2 of the EU ETS (from 2008 to 2012) comprised 94 Slovenian carbon-intensive 1049 Carbon cost structures installations, complete data were only available for 76 firms. The other 18 firms are either no longer in business or the pertinent data were not available. The sector distribution of these 76 firms is presented in Table II. The distribution is similar to the overall distribution of EU firms presented in Table I, with the majority of firms operating“combustion installations”. Qualitative data were collected from several sources, including interviewing managers responsible for climate change and carbon management issues in selected firms. We focussed on the largest CO 2polluters, as a result of the view that they would have the richest data concerning the subject under examination. Following Eisenhardt’s (1989) suggestion of pairing cases that represent polar opposites with respect to whatever issue is under examination, we identified three company pairings drawn from each of the proposed carbon-intensive sectors (i.e. electricity vs heat; cement vs steel; insulation materials vs drugs). We identified target interviewees within these six companies on the basis of their involvement with carbon management issues. All interviews were conducted at the companies’premises and audio recorded. The interview protocol was semi-structured, focussed on different aspects of corporate CO 2abatement strategies. The average interview duration was around 90 minutes. Interviews were transcribed and translated into English by a bilingual native Slovenian. A description of the companies representedin the interviews is provided in Table III. In reviewing the transcripts we focussed on points of difference across the distinct sectors. Comparison is the dominant principle of the analysis process in qualitative research (Boeije, 2002; Glaser and Strauss, 1967). Since qualitative analysis suffers from the validity threat of researcher bias (Mertens, 2004) considerable effort was made to undertake the analysis objectively. When comparing interviews within and across groups, we compared Sector Number of installations % of installations Combustion installations–energy sector 9 12 Combustion installations–manufacturing sector 42 55 Mineral-oil refineries 0 0 Production of iron and steel 6 8 Production of cement and lime 5 7 Manufacture of ceramic 4 5 Manufacture of pulp and paper 9 12 Other 1 1 Total 76 100 Table II. Slovenian sample’s alignment to European Union ETS sectors Case firm symbol Company descriptionSales revenues in€million 2012Average annual CO 2 emissions 2008-2012 in tonnesRelative proportion of process emissions (%) E1 Coal-fired power plant 242 4,300,824 0 E2 Coal-fired heat and power plant62 769,556 0 MP1 Cement manufacturer 68 423,819 70 MP2 Steel manufacturer 150 87,055 40 a MC1 Insulation materials manufacturer70 81,724 0 MC2 Pharmaceuticals manufacturer932 23,710 0 Notes: aThis proportion is relatively low for the steel manufacturing process because the company uses scrap steel as an input. Recycling steel is less carbon-intensive than primary manufacturing from iron ore Table III. Description of the companies represented in the interviews 1050 AAAJ 30,5 fragments from interviews that concerned the same theme, as themes function as criteria for the systematic comparison of interviews (Boeije, 2002). The key themes examined were determined by the study’s propositions, i.e. relationships between positive and negative outputs and also CO 2emission abatement strategies. 4.2 Model and variable measurement for P1 Total CO 2emissions have been measured in terms of tonnes per annum. Securing a measure of product output volume proved to be more challenging, however. The preferred measure in carbon intensity studies is units of production (Hoffmann and Busch, 2008). This measure is problematical, however, when considering firms across diverse industries that produce very different products. Further, units of production are often not disclosed by firms. In light of this, consistent with the suggestion of Hoffmann and Busch (2008), sales revenue has been adopted as the proxy for output. In order to eliminate firm size effects and also potentially problematic outliers (Hsiao, 2003), the relative growth rate of both variables has been calculated. Hence, the panel model that we test is: DCO 2it ¼aþb DSR itþe it whereΔCO 2it¼(total emissions t total emissions t 1 )/total emissions t 1 ;ΔSR it¼(sales revenue t sales revenue t 1 )/sales revenue t 1 ;i¼firm;t¼year. Four variations of the model have been tested. The overall model includes all 76 sampled companies. Three sub-models have been tested for each carbon-intensive sector separately. The energy sector is represented by nine firms (see Table II). Manufacturers of iron, steel, cement, lime, ceramic, and pulp and paper (25 firms in the sample) represent firms that transform other CBM. The remaining 42 manufacturing firms represent a variety of manufacturing subsectors. 5. Findings 5.1 Panel data analysis The results of the panel data analysis are presented in Table IV. The first data column in Table IV provides the results of fitting the regression equation to the entire sample. This formulation reveals a degree of statistically significant association between the two outputs (po0.01). The regression coefficient is 0.12, signifying that a 1 per cent change in sales revenue triggers a 0.12 per cent increase in CO 2emissions. It is noteworthy that the explained variance of this model is only 7 per cent. This general relationship masks, however, the different impacts of sales revenue on CO 2 emissions across the different carbon-intensive sectors that make up the whole sample. For the energy sector (sub-model 1), the proportional changes in sales revenue are almost Parameter Overall modelSub-model 1 energy sectorSub-model 2 manufacturing firms transforming other CBMSub-model 3 other manufacturing firms Firms (observations) 76 (380) 9 (45) 25 (125) 42 (210) a(intercept) 0.03** 0.07 0.06** 0.02* b(coefficient) a 0.12** 1.01** 0.62** 0.05* F-value 25.36 11.54 128.66 5.39 R 2 0.07 0.36 0.51 0.02 Notes:CBM, carbon-based materials. aCoefficientbis interpreted as follows: a value of“1”indicates a symmetrical relationship, i.e. a 1 per cent change in positive output causes a 1 per cent change in negative output; a value of“0”indicates no relationship. *po0.05; **po0.01 Table IV. Results of the panel data analysis for the period 2007-2012 1051 Carbon cost structures symmetrically related to proportional changes in CO 2emissions, (po0.01) and the model’s explained variance is strong at 36 per cent. For the manufacturing sector involved in transforming other CBM (sub-model 2), the relationship between the two outputs is fairly strong (po0.01). A 1 per cent increase in sales revenue results in a 0.62 per cent increase in CO 2emissions, and the explained variance of sub-model 2 is 51 per cent. Conversely, for other manufacturing firms (sub-model 3), while there is a statistically significant relationship between sales revenue and CO 2emissions, the size of the impact that sales revenue changes have on CO 2emission changes is small. A 1 per cent increase in sales revenue results in a 0.05 per cent increase in CO 2emissions and the explained variance of sub-model 3 is only 2 per cent. Overall, the coefficients in the three sub-models supportP1. We also depict the relationships between sales revenue (positive output) and CO 2 emissions (negative output) graphically in Figure 2. It is striking how a parallel can be drawn between Figure 2 and cost behaviour graphs provided in the normative accounting literature (Horngrenet al., 2014) in order to highlight distinctions between variable, semi-variable, and fixed costs. 5.2 Interview findings The two companies drawn from the energy sector are the biggest CO 2emitters in Slovenia. E1, the nation’s largest coal-fired power plant, is solely responsible for about half of Slovenia’s total CO 2emissions included in the EU ETS. E2 provides heat for Ljubljana, the nation’s capital. Although E1’s representative indicated that the company’s management endeavours to reduce total emissions, he provided a strong affirmation that the relationship between electricity output and CO 2output is almost proportionate in the short term. E2’s representative provided similar insights. He provided a strong suggestion that the CO 2 emissions/heat output relationship is relatively fixed in the short term. With respect to CO 2emission abatement strategies, in E1 reductions in total emissions are sought via changes in fuel used and technology improvements. At the time of the interview, E1 had recently pursued significant initiatives along both dimensions. With respect to fuel used, in 2008 the company’s two oldest lignite-fired boilers (capacity 2×30 MWh) were replaced by natural-gas-fired boilers (capacity 2×42 MWh) which enabled lower CO 2 CO 2 Q Energy sector Manufacturing combustion Manufacturing processes Figure 2. Observed relationships between changes in positive and negative outputs across carbon- intensive sectors 1052 AAAJ 30,5 emissions for given levels of electricity output. Also in 2008, the company started co-burning biomass with lignite, which reduced total emissions by 2.3 per cent. In terms of technology, E1 is currently finishing a€1.3 billion investment in a new 600 MWh boiler that will replace all of the current out-dated lignite-fired boilers still in operation (a combined capacity of 695 MWh). This investment will secure the same electricity output with about 30 per cent lower total CO 2emissions, despite usage of the same fuel (lignite). In the interviewee’swords,“this is a substantial improvement in carbon efficiency”. Despite notable efforts to cut total CO 2emissions, the interviewee noted a paradoxical dynamic that was inhibiting the company’s capacity to reduce CO 2emissions: Our plant traditionally burns local lignite from the next-door mine. The local lignite is low in quality and energy value and so we could substantially improve our carbon efficiency by using higher quality imported coal. The lignite is, however, the only domestic source of primary energy, thus the national energy strategy calls for the further burning of this coal because it reduces our dependence on imported primary energy. E2’s representative also contended that the only option to lower emissions is to change the fuel used or technology. E2 started the journey of seeking lower CO 2emissions more than a decade ago, primarily by switching fuels. The interviewee referred to three major initiatives that had been implemented. First, in 2002 the company had switched from dirty and low energy-value local lignite to cleaner and higher energy value imported black coal. Second, they had subsequently introduced co-burning of coal and biomass, which is considered to be carbon-neutral. Third, at the time of the interview, E2 was investing in a new natural-gas- fired boiler (capacity 60-90 MWh) to replace two out-dated coal-fired boilers. It was noteworthy that E2’s representative noted that while switching fuels had substantially reduced E2’sCO 2emissions, he felt the potential to achieve further process improvements was shrinking significantly. The next two companies examined represent heavy industry. They involve a mix of process and combustion emissions. MP1 is a cement manufacturer and ranks as Slovenia’sfourth largest CO 2emitter. MP2 is a steel manufacturer and is Slovenia’s seventh largest CO 2emitter. MP1’s representative emphasised that his company is highly environmentally conscious. He noted though that fluctuations in his company’sCO 2emissions in recent years were largely attributable to changing levels of cement production (cement production was severely affected by the broad collapse of the construction industry in Slovenia during the 2009 global financial crisis). MP2’s representative also noted that his company maintains a continual vigilance forwaystoreduceCO 2emissions. To support this, he presented detailed carbon efficiency calculations dating back to 1986. In the 2000-2008 period, MP2 improved its carbon efficiency from 0.73 to 0.61 tonnes of CO 2emissions per 1 tonne of steel output. This indicator deteriorated in 2009 due to a steep reduction in steel output (by 50 per cent) not mirrored by the same relative decline in CO 2output (by 20 per cent). At the time of the interview, the ratio was moving back to its 2008 level. Aside from 2009 and 2010, MP2’s total CO 2emissions had been fairly stable for the ten years prior to the interview. This is because improvements in carbon efficiency had been offset by increased levels of steel output. The efforts of MP1 to reduce CO 2emissions have been focussed almost exclusively on combustion emissions. For example, shortly prior to the interview they had introduced highly efficient boilers and started co-burning waste and biomass. Although further cuts in combustion emissions could be achieved by replacing coal with natural gas, the MP1 representative noted that this was not economically viable, as gas represented a more expensive form of fuel. MP1 had directed little effort to reducing process emissions, however, as is evident from the interviewee’s comment: Lowering process emissions is far more difficult and we yet have to bite into this apple […] A radical innovation to cut process emissions would be to invent a substitute for cement. 1053 Carbon cost structures Unlike MP1, MP2’s representative contented that his firm was already operating with the best available technology in terms of combustion emissions (burning natural gas), hence further efficiency improvements from combustion are unlikely. Similar to MP1’s interviewee, the MP2 interviewee felt there were unlikely to be any improvements made with respect to process emissions. He commented: A deliberate decrease in process emissions per unit of output is almost impossible with the current state of technology. The two manufacturing firms that do not transform other CBM are multinationals that operate under internationally recognised brand names. MC1 is a subsidiary of one of the world’s leading manufacturers of insulation materials. MC2 is one of the world’s leading generic drug manufacturers. The representatives of MC1 and MC2 indicated that their companies’CO 2emission levels were more or less fixed. Both felt that their companies were applying best available technology, having switched to state-of-the-art natural-gas-fired steam boilers before the EU ETS was introduced. The interviewees claimed these boilers were operating at maximum efficiency. The MC2 interviewee commented: Although our total emissions were almost constant throughout the 2008-2012 period, we see this as a great success. During this period, we roughly doubled our sales and opened some new facilities, yet managed to keep total emissions stable. These interviewees also expressed similar views with respect to the management of CO 2 emissions. Both interviewees indicated that there was minimal scope for any further CO 2emission reductions with the current state of technology. The MC2 interviewee did acknowledge, however, that one option to further cut emissions would be to introduce solar panels, but he noted: This is close to impossible with the current state of technology, due to the sheer size of our manufacturing complex and also because the installations are running non-stop. It was evident that both companies were highly focussed on optimising carbon efficiency/ intensity by minimising CO 2emissions per kg of output. The interviewee in MC1 indicated that this focus was not ecologically motivated, it stemmed from cost minimisation interests, as energy use represents a significant cost for the company. The interviewee in MC2 on the other hand indicated that ecology is also a notable motivation. The primary findings emanating from theinterviews are summarised in Table V. Essentially, qualitative observations concernedwith the dual output relationship are consistent with findings from the panel data analysis, thus providing additional support forP1. As a validation of the qualitative findings, Table V also provides quantitative indices for positive and negative output performance levels for the period 2008-2012 (and also a derived carbon intensity index) for the six companies examined. As is evident from this table, although all examined companies have improved their carbon intensity (CI indexo100), only two companies also managed to lower their total CO 2emissions (NO indexo100). These indices also represent a corroboration of the study’s qualitative findings. 6. Discussion and conclusion Despite continuing warnings from the scientific community with respect to the social and economic implications of global warming, anthropogenic carbon dioxide emissions continue to rise, even in many developed countries (IPCC, 2014; Olivieret al., 2012). While there has been some technological innovation consistent with less and more efficient use of carbon-based resources (Blanford, 2009; Oliver, 2008; Tavoniet al., 2012), continued worldwide economic growth continues to escalate anthropogenic carbon dioxide emissions (Stern, 2011; York, 2012). 1054 AAAJ 30,5 This study contributes to our understanding of how different technological processes signify different drivers of carbon-based resource consumption (carbon costs), CO 2emissions, and corporate strategies concerned with efficient carbon management across carbon-intensive sectors. The study draws considerable novelty from the fact that despite growing interest in the climate change issue, there has been scant empirical research on CO 2emissions conducted from a cost management perspective. The study is believed to represent the first management accounting work to explore the distinction between combustion- and process-related CO 2 emissions. The view that eco-efficiency is more consistent with the economic than the environmental pillar of sustainability, represents a further distinctive facet of the study. The study provides support for the view that the relationship between economic growth and CO 2emissions is not uniform across carbon-intensive firms, rather it is moderated by the main driver of carbon-based resource usage. It appears industries can be identified where product output volume has a major impact on CO 2emission volume. In other industries, however, it appears the main driver of fossil fuel usage (and hence combustion emissions) is capacity, not product output. The data triangulation approach undertaken can be seen as a key facet of this study. The extent to which this approach produced consistent findings across the two data collection methods deployed can be most easily assessed by comparing the analysis of the quantitative data reported in Table IV with the qualitative data observations reported in Table V. Table IV reveals that the highest degree of causality between sales revenue and CO 2emissions was in evidence in the energy sector (sub-model 1). The second highest degree of causality was found in the manufacturing sector involved in transforming other CBM (sub-model 2), and the weakest degree of causality was found for other manufacturing firms (sub-model 3). This ranking of the three sectors is replicated in Table V. In Table V, the revenue impact on CO 2emissions is assigned a“very strong”standing for the two energy firms examined, a“moderate”standing for the two manufacturers transforming other CBM and a“weak”standing for the two firms representing the other manufacturing sector. From a cost and management accounting perspective, these findings provide useful insights into differential carbon cost structures across industries. Carbon-based resource consumption not only triggers undesirable emissions, it also signifies the incurrence of a financial cost. Although this study’s focus has been directed to the CO 2emission quantum component (not the financial cost component) associated with carbon-based resource consumption, insights concerning carbon cost structures are nevertheless evident. When consumption of carbon-based inputs is driven by product output, carbon costs are largely Actual performance index 2012/2008 CompanySales impact on CO 2emissions Observed climate change abatement strategy PO NOCI¼NO/ PO E1 Very strong Installing more efficient boilers, partially switching fuel 107.7 103.5 95.7 E2 Very strong Fuel switching, installing more efficient boilers 104.0 88.1 84.7 MP1 Moderate Combustion emissions: more efficient boilers Process emissions: no action taken99.7 85.4 85.6 MP2 Moderate Combustion emissions: operate with BAT Process emissions: no action taken128.1 104.3 81.4 MC1 Weak Operate with best available technology (BAT) Improving carbon efficiency367.7 105.0 28.5 MC2 Weak Operate with best available technology (BAT) Improving carbon efficiency175.2 107.6 61.4 Notes:PO, positive output; NO, negative output; CI, carbon intensity Table V. Summary of the qualitative findings 1055 Carbon cost structures variable (in the energy sector). When carbon-based resource consumption is driven by capacity, the costs are largely fixed within a relevant range (in manufacturing firms not transforming other CBM). When carbon-based resource consumption is driven by both product output levels and capacity, carbon costs are semi-variable, i.e. they depend on the relative mix of resources used (in manufacturing firms transforming other CBM). These findings are consistent with prior investigations that hold that cost drivers in the corporate context can be classified as output volume based or capacity based (Banker and Johnston, 1993; Leitch, 2001). As a relative methodological novelty, this study investigated carbon cost drivers in a sample of companies that are similar in terms of resource consumption, not in terms of product offerings. Prior empirical studies concerned with identifying cost drivers have mainly investigated samples of companies from the same industry, such as airlines (Banker and Johnston, 1993), hospitals (Holzhackeret al., 2015; MacArthur and Stranahan, 1998), or a sample of facilities within the same electronics company (Foster and Gupta, 1990). The study also examined CO 2emission abatement strategies in carbon-intensive companies. Data collected in two energy companies support the view that energy firms have a large deficiency gap within the carbon paradigm (Edenhoferet al., 2009; Markovic Hribernik and Murks, 2007). This was particularly evident in Slovenia’s largest CO 2emitter that was found to be generating electricity primarily by burning lignite in out-dated boilers, one of the least efficient electricity generating technologies (Oliver, 2008). CO 2emission abatement strategies were found to be similar in both energy firms examined, involving a combination of replacing lower energy-value fuels with higher energy-value fuels and installing more efficient boilers. A similar strategy was noted by Hoffmann (2007) for German electricity firms. Consistent with prior evidence, the manufacturing firms examined were found to exhibit relatively low deficiency gaps (Cadez and Czerny, 2010; Markovic Hribernik and Murks, 2007). Both of the manufacturing firms that do not transform other CBM had already adopted state of the art technologies (i.e. burning natural gas in highly efficient boilers) and exhibited fixed overall emission levels. So, as expected, both entities pursued an increased carbon efficiency strategy based on positive output expansion. In the five year period examined, the insulation materials manufacturer had achieved a surprisingly largeincreaseinoutputof268percent.Althoughthesetwofirmsrepresentextreme cases with respect to their increased levels of output, it is significant for this study that, despite their large production expansion, both firms had managed to maintain stable total emission levels, signifying large improvements in their respective carbon intensity levels. The two manufacturing firms that transform other CBM appeared to be the most inhibited with respect to attempts directed to lowering total emissions or improving carbon efficiency levels. Representatives of the two firms representing this sector proclaimed that reducing the consumption of other carbon-based materials (process emissions) per unit of output is almost impossible, given the current state of technology. This view corroborates the findings of earlier studies that have explored the potential to reduce CO 2emissions in cement and iron manufacture (Benhelalet al., 2013; Worrellet al., 2000, 2001). Both firms investigated in this study had made improvements only in the area of combustion emissions. Collectively, the distinctive emission abatement strategies that are evident across the three sectors examined provide support forP2. When sectors are defined by the main driver of carbon-based resource consumption, it has been found that emission abatement strategies are relatively heterogeneous across sectors, but relatively homogeneous within sectors. As expected, low efficiency levels in the energy sector provide scope for significant improvements both in terms of reducing total emissions and securing greater carbon efficiency (Edenhoferet al., 2009). Relatively efficient manufacturing firms not transforming 1056 AAAJ 30,5 other CBM appear to pursue a strategy of seeking improved levels of carbon efficiency through increasing positive output without increasing productive capacities. Relative to the other sectors, manufacturing firms that transform other CBM pursue less uniform emission abatement strategies. Despite this, a factor that the two firms investigated have in common is the limited attention they have directed to tackling process emissions. Some emission abatement strategic directions appear to be universal. All of the firms investigated in the study’s qualitative data collection phase demonstrated improvements in their carbon intensity (inverse indicator of carbon efficiency). For five of them, the improvement was considerable, and in the sixth firm (Slovenia’s largest CO 2emitter), carbon intensity was due to improve significantly, as soon as the planned new boiler was put into operation. This suggests that all firms were demonstrating degrees of eco-efficiency by improving their productive and ecological efficiency levels simultaneously (Al-Tuwaijri et al., 2004; Burnett and Hansen, 2008; King and Lenox, 2002; Klassen and McLaughlin, 1996). Yet, despite these carbon intensity improvements, four firms had increased their total CO 2emissions in the 2008-2012 period. This is due to efficiency improvements being more than offset by increased levels of positive output. There is some resonance in the study’s findings with the wider accounting for sustainability literary discourse. First, the study is supportive of prior contentions that management accountants can easily embrace the language of eco-efficiency, due to its parallel with accountants’conventionally close association with promoting efficient use of inputs in production processes (Bouten and Hoozée, 2013; Burnett and Hansen, 2008; Figge and Hahn, 2013; Virtanenet al., 2013). Since eco-efficiency does not challenge traditional economic imperatives, decision makers with a short-term economic agenda (Boston and Lempp, 2011; Hopwood, 2009) can focus on eco-efficiency as consistent with an interest in economic efficiency (Owen, 2008). Second, in the external reporting context, the absence of generally accepted carbon performance indicators signifies that management accountants can provide the lead in interpreting carbon efficiency gains as a carbon performance success tale that can be relayed to external stakeholders (Bowen and Wittneben, 2011; Hartmannet al., 2013). A worrying implication of the study’s findings is that eco-efficiency is a necessary, but not a sufficient condition for a reduction in total CO 2emission levels (Bebbington and Thomson, 2013). This finding is important in light of increasing scholarly interest in the relationship between corporate environmental and financial performance. Most studies in this area measure environmental performance in relative terms, such as waste prevention relative to firm size (King and Lenox, 2002), the ratio of toxic waste recycled to total toxic waste generated (Al-Tuwaijriet al., 2004), relative pollution levels across firms (Burnett and Hansen, 2008; Mir and Rahaman, 2007), toxic releases scaled by costs of goods sold (Clarksonet al., 2011), or by self-reported perceptual measures (Henri and Journeault, 2010). Many of these studies find a positive relationship between environmental and financial performance, which is seen as supportive of the eco-efficiency (win-win) theory, yet very few studies provide evidence that total pollution levels have also been reduced. Observations made in this study signify that although a company’s set of external reports might be unable to report success in terms of total decarbonisation, this should not be seen as signifying a company’sfailuretoengage in and maybe invest in decarbonisation initiatives. It could simply be that increased CO 2 emissions resulting from greater output have more than off-set reduced CO 2emissions resulting from recently implemented carbon efficiency initiatives. From a holistic perspective, these findings support recent calls for segregating environmental performance into eco-efficiency and eco-effectiveness components (Milne and Grubnic, 2011; Thomsonet al., 2014). Eco-efficiency is concerned with optimising input/ output relationships (Figge and Hahn, 2013), without questioning the objective’s 1057 Carbon cost structures sustainability (Thomsonet al., 2014). Eco-effectiveness, on the other hand, is focussed on systematic changes that result in sustainable transformation (Thomsonet al., 2014). This quest is consistent with at least reducing, if not eliminating, total, not just relative, pollution levels. Bebbington and Thomson (2013) argue that management accounting researchers have not yet crossed the eco-efficiency boundary but are urged to do so if they are to support sustainable development transition. A key managerial implication is that a long-term improvement in carbon efficiency does not translate into a long-term reduction in CO 2emissions if outputs are rising at a higher rate than the rate of carbon efficiency improvements (Milne and Grubnic, 2011). This highlights the problem of carbon-intensive firms stubbornly residing within the traditional carbon paradigm, despite their awareness oflow-carbon alternatives. While efficiency improvements play animportant role in stabilising total CO 2 emissions (Pinkse and Kolk, 2010), much more radical improvements are required if there is to be a substantial decrease in anthropogenic interference with the climate system (Meinshausenet al., 2009; Ramanathan and Feng, 2008). In addition to the paper’s key insights concerning industry groupings and differentials in CO 2emission drivers and CO 2emission abatement strategies, the study provides an important pointer for future research. This is because the findings call into question the eco- efficiency theory that posits a positive relationship between corporate economic and environmental performance (Burnett and Hansen, 2008). The revelations of this study are more consistent with traditional assertions that trade-offs in corporate sustainability are the rule rather than the exception (Pinkse and Kolk, 2010). When interpreting the study’s findings, its limitations should be borne in mind. The generally acknowledged limitations of quantitative and qualitative research give cause for exercising caution. There are also some study-specific limitations. With respect to the quantitative analysis, the panel model could have been strengthened through the inclusion of pertinent control variables. Further, the proxy for product output may include some measurement error. Sales revenue is not a perfect measure because firms’ product mixes and selling prices change over time (Letmathe and Balakrishnan, 2005), and for non-service industries, if there is a change in finished goods inventory, then output does not equate with sales volume. While data were collected from a large proportion of the population of firms under examination(76 of the 94 Slovenian firms operating in the EU ETS between 2008 and 2012), it should be noted that Slovenia is a small country and caution should be exercised whenseeking to extrapolate the study’s quantitative findings to other parts of the world. As for the qualitative analysis, it would be misleading to claim that the selected firms are archetypal for the different sectors examined. At the same time, such a constraint might be countered by the phenomenon whereby more extreme cases can be richer in information than average cases (Eisenhardt, 1989). Despite these limitations, there is high consistency in the conclusions drawn from the quantitative and qualitative phases of the study, a factor imbuing the study’s findings with relative validity. It is hoped that this study will trigger more academic attention directed to examining ways that the management accounting perspective can be drawn upon to further man’s efforts to curtail CO 2emissions. In addition we would like to see a greater involvement of practicing management accountants in tackling the“CO 2emission problem”. It appears that accountants are in a strong position to embrace the language of eco-efficiency. In addition, as noted above, management accountants could lead the reporting of carbon efficiency advances reported to external stakeholders. One way to trigger such developments would be for management accounting professional bodies to include an examination of the costs associated with CO 2emissions, the drivers of these costs as well as CO 2emission abatement management, as part of their professional examination curricula. 1058 AAAJ 30,5 Acknowledgements The authors thank the anonymous reviewers and the Editor for their constructive comments which have helped in revising the paper. The authors thank the participants and organisers of the 2012 European Accounting Association Conference in Ljubljana and also the 2012 Manufacturing Accounting Research conference held in Helsinki. The paper has also benefited from presentations made at Bond University, Griffith University, University of Southern Queensland, and WHU Otto Beisheim School of Management. 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