Biotechs gear up for new 'best practice' rules

In this financial year's upcoming crop of annual reports, ASX-listed companies will have to include a section disclosing their adherence to the 10 essential corporate governance principles developed in 2002 by the exchange's corporate governance council as a framework for best practice.

Companies don't have to follow the principles to the letter -- they cover such factors as the roles and composition of the board and management, safeguarding the integrity of financial reporting, and making sure material matters are disclosed to shareholders in a timely and balanced way -- but they do have to disclose where they vary from best practice and why.

But industry analysts don't believe that the principles will have a big effect on the majority of Australian biotech companies, which started adopting the guidelines last financial year, along with the rest of the listed market.

"By and large, most companies have moved toward adopting those regulations without issue," says analyst and BioShares co-editor David Blake. "A much bigger challenge will be complying with the new ASX reporting guidelines for biotechnology companies."

One recommendation with which some biotechnology companies show no signs of complying relates to combining the role of the CEO and chairman of the board into an executive chairman role -- the recommendations clearly state that this is not a desirable situation.

"I haven't seen any of those companies with the chairman also acting in a managing director capacity change, and they'll probably do everything they can to stay the same," Blake says.

Southern Cross Equities' biotechnology analyst Stuart Roberts agrees. He believes that while it is not a big factor, it does have an impact on investor opinion of the company.

"I have found the companies in which the offices of the chairman and the CEO are combined tend to have a strong personality in charge, and the market tends to be adverse to this," he says. "It's not a bad thing in itself... but it would be in the best interests of these companies to adopt best practice and get an independent chair."

Along the same lines is the matter of board independence -- the corporate governance recommendations suggest that the majority of the board members should be independent.

"Companies with independent boards are governed better and it shows through," Blake says. "Possibly as many as 50 per cent of Australian biotechnology companies will have to be considering the composition of their boards."

Roberts sees it as an opportunity to introduce diversity to the board, including members with scientific expertise, commercialisation experience, and legal nous, in addition to the original developers of the technology.

In the end it comes down to the company presenting a serious and professional face to the investment community.

"Investors look at the boards, the people involved and their track records," Blake says. "Companies not following best practice guidelines might be ignored by investors."

The ASX's 10 essential principles of corporate governance:

• Recognise and publish the respective roles and responsibilities of board and management.
• Have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.
• Promote ethical and responsible decision-making.
• Have a structure to independently verify and safeguard the integrity of the company's financial reporting.
• Make timely and balanced disclosure of all material matters concerning the company.
• Respect the rights of shareholders and facilitate the effective exercise of those rights.
• Establish a sound system of risk oversight and management and internal control.
• Fairly review and actively encourage enhanced board and management effectiveness.
• Ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to corporate and individual performance is defined.
• Recognise legal and other obligations to all legitimate stakeholders.