Corporate Governance in New Zealand – Revised Principles and Guidelines from the FMA

3 February 2015

Introduction

In the week before Christmas the FMA published a revised version of its 2004 handbook: Corporate Governance in New Zealand – Principles and Guidelines. The press statement from the FMA said that it had undertaken a consultation process – and revised the original publication “where appropriate”.

The FMA also noted that the handbook is intended as a reference guide for directors, executives and advisers, to help them decide how best to apply the 9 key corporate governance principles originally identified by the Securities Commission.

Also, governance and culture has been identified as one of the FMA’s strategic priorities that will guide its work over the coming 3 years – and that future work on this area may result in a new version of this handbook being released, or separate, more targeted corporate governance guidance being produced.

It seems that the revised version of guide is an interim measure – and, whilst there is talk of further alignment with any changes made by NZX to their corporate governance requirements for listed issuers and further trans-Tasman harmonisation, including with both ASX principles and ASIC guidelines, the FMA’s intention is review its guide after the OECD has finalised its work on the development corporate governance principles (see below).

Key changes

Whilst the FMA has a limited, and rather specific, jurisdiction, the handbook sets out guidelines, which are examples of the types of corporate governance structures and processes that will help entities in a broad range of activities comply with each principle. The FMA says that whether the guidelines are suitable for a particular entity or not will depend on a number of factors – and that, because the principles are expressed broadly and different entities will find different ways of achieving them in a manner that is appropriate for each entity’s size, activities and ownership structure. (And that it does not expect entities to report against the specific guidelines).

The content of the guide is refreshed in the following areas:

• How to report against the principles: Because the audience for annual reports is broad, and the way people access and receive their information is changing rapidly – the concept of reporting against the principles has been expanded to refer to both annual reports and company websites (or a combination of the two).

However, the FMA do not favour an “if not, why not” approach – because the guide is aimed at generating high-level principles. Instead it encourages entities to explain to their shareholders, investors and stakeholders, how they meet the principles. For example, board committees may not be appropriate for the size, scale and nature of some entities.

Rather than report against the guidelines, the FMA provides examples of how compliance with the principles might be achieved and reported. This is in keeping with the FMA’s wish not to resort to a checklist-type approach to guidance. Issuers subject to other corporate governance reporting requirements may already provide appropriate information that is sufficient to show how they meet the principles

• Ethical standards: The FMA has included some additional points on ethical standards for boards to consider, in line with the recently revised ASX principles for corporate governance.

• Composition and diversity: Additional factors for boards to consider, in this area, include the reporting of performance against diversity policies to shareholders and stakeholders. (Diversity includes considerations of gender, ethnicity, cultural background, age and specific relevant skills).

The FMA has also shied away from recommending maximum periods for board appointments. As with diversity, it sees this as an issue that will vary across the different types of entities that the principles apply to, and encourages boards to think carefully about tenure and the needs of their particular business.

The FMA also notes that the board should consider using a board skills and capability matrix to identify current and future skills, capability and diversity needs of the entity.

The FMA also note that some submitters asked them to further define independence and to align this with NZX and the Institute of Directors, allowing boards in New Zealand to have a single definition to work with. Whilst noting that this is an area that could benefit from further work and “engagement” – the FMA provides a list of factors influencing independence as a useful starting point for boards.

• Board committees: The FMA has highlighted the important role of audit committees and included commentary on other committees – such as risk committees – that boards, depending on their size and particular needs, may wish to consider to complement their governance structures. Publication of all committee charters on company websites is also encouraged.

• Reporting: Under this heading, updates have been made to reflect changes in audit and accounting standards and terminology. The commentary on continuous disclosure for listed issuers has also been updated.

• Remuneration: Minor changes have been made – with the aim of increasing boards’ focus on ensuring transparent remuneration arrangements, such as providing greater transparency on incentive payments.

• Risk management: The FMA say that, as a result of the increased global focus on risk management, this section has been updated to ensure boards have appropriate risk frameworks and strategies in place, have appropriate oversight of these, and report to their investors on these matters.

This seems particularly topical in light of the changes brought about by the coming into force of the new disclosure regime under the Financial Markets Conduct Act 2013 – and the greater emphasis on ongoing reporting (rather than just the static disclosure that underpinned the old prospectus and investment statement disclosure regime).

• Auditors: Updates have been made to reflect changes to practices and legislation since 2004, while retaining the focus on audit quality and independence.

A link to the revised guidelines is here:  https://www.fma.govt.nz/assets/Report-and-Papers/Consultation/Corporate-Governance-Handbook-Principles-and-Guidelines.pdf

OECD Principles of Corporate Governance

First released in May 1999 and revised in 2004, the OECD Principles are one of the 12 key standards for international financial stability of the Financial Stability Board and form the basis for the corporate governance component of the Report on the Observance of Standards and Codes of the World Bank Group.

The OECD is currently conducting a review of the Principles to ensure their continuing high quality, relevance and usefulness, taking into account recent developments in the corporate sector and capital markets.

The extent to which the lessons from the GFC filter through into changes to the OECD Principles and the how the FMA and other relevant bodies in this part of the world (including agencies in Australia) consider them relevant in a New Zealand context will have to await the outcomes of the OECD review – later this year.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.