Get familiar with new ASX rules, biotechs told

Biotechnology companies should make themselves aware of the new guidelines for corporate governance released by the ASX recently, says Chris Sotiropoulos, VP for commercialisation at Melbourne-based technology business development and commercialisation company Biocomm.

The guidelines cover 10 core principles with recommendations for best practice, and were developed by the ASX Corporate Governance Council in response to several international instances of corporate misconduct that have had global repercussions on accounting practice and corporate governance.

While companies are not forced to comply with the new best practice rules, they will be required to explain in their annual reports the extent that they are following the principles, and give reasons for any deviations from best practice.

Sotiropoulos said that biotechnology companies should examine the recommendations in the context of their own structures to decide how best to incorporate them, particularly if the company is planning to form relationships with US-based organisations.

"The tenor of these guidelines is to more tightly control the board, how it operates and its relationship to the management of the company," Sotiropoulos said.

Foremost among the principles are recommendations that companies clearly define the roles and functions of the board and those delegated to the management, ensuring that there is a balance of powers between the two.

"You want to have an element of security, if you have a strong overlap of the board and management, it may be seen as not safeguarding the integrity of the company," Sotiropoulos said.

Changes to the structure of company boards have also been highlighted, with recommendations that the majority of the board be non-executive, independent directors. In addition, the guidelines recommend that interests of an independent director is carefully assessed to identify any conflicts of interest that might arise through the associations of the directors with other companies, organisations, committees and even family.

"It's a higher standard, that looks beyond the relationships with individuals," said Sotiropoulos. "The principle is ensuring that if any director has a material relationship with another company or other activities, then it should be raised to the attention of the board. The board may have to exclude certain directors from certain activities."

But according to Sotiropoulos, this could end up being a blessing in disguise for biotech companies, allowing them the scope to expand the board to include directors with appropriate scientific insight, commercial experience, or experience specific to the stage of the company's development.

A third point that Sotiropoulos believes is important for biotechnology companies is the recommendation that companies develop a communications strategy to promote effective communication with the shareholders, and encourage effective shareholder participation at annual general meetings. One suggestion is that companies include an external auditor at annual general meetings to answer shareholder questions about the annual report.

"The aim is to narrow the gap between the expectations of the company and the expectations of the shareholders," he said. "This means the shareholder should get more information as appropriate and the board should receive shareholder feedback."

Other guidelines deal with issues of decision-making, risk management, financial reporting, encouraging performance and fair remuneration.

Sotiropoulos said that following the best practice guidelines would demonstrate to shareholders that the board was proactive, and committed to acting in the best interests of both the company and its shareholders.

"If it is a significant burden to develop a compliance system, then that can be seen as a downside," Sotiropoulos said. "But developing a communications strategy, looking at the directors' outside relationships and bringing on extra directors who can add value to the business are all upsides."

"Non-disgruntled shareholders are more likely to stay on through fluctuations in the price due to external factors, such as a global downturn in the sector."

The ASX's 10 essential principles of corporate governance:

1. Recognise and publish the respective roles and responsibilities of board and management.

2. Have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.

3. Promote ethical and responsible decision-making.

4. Have a structure to independently verify and safeguard the integrity of the company's financial reporting.

5. Make timely and balanced disclosure of all material matters concerning the company.

6. Respect the rights of shareholders and facilitate the effective exercise of those rights.

7. Establish a sound system of risk oversight and management and internal control.

8. Fairly review and actively encourage enhanced board and management effectiveness.

9. Ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to corporate and individual performance is defined.

10. Recognise legal and other obligations to all legitimate stakeholders.

For recommendations and case studies, download the recommendations from the ASX website: http://www.asx.com.au/about/CorporateGovernance_AA2.shtm