NZX review of corporate governance reporting requirements

Having helped write a submission on the first round of consultation by NZX on its corporate governance reporting requirements, I was interested in the next round – being the responses received from interested parties in response to proposed changes.

NZX has published the on-confidential submissions received from 40+ responders, grouped into the category of responder, namely:

• Accounting and auditing
• Gender Diversity/Diversity
• Governance groups
• Health & Safety
• Investors
• Listed issuers
• Law firms
• Sustainability groups
• and a report on the views of 15 smaller to medium sized listed issuers

In the time available to me, it is difficult to get an accurate weighting on any sort of consensus on the specific areas that NZX raised for responders attention. As a result, I will await the next round of material from NZX (a consultation document with proposed rule changes) due by mid-year.

Equally difficult to determine has been the level of support for NZX preference for a tiered approach to reporting requirements and expectations (i.e. principles, recommendations (or guidelines) and commentary). Under this approach, the principles outline the overarching concept for each topic and are supplemented by recommendations which outline in more detail the particular matters which are expected of issuers in relation to the principle discussed. These recommendations would be more prescriptive (with a requirement that they be met on a “comply or explain” basis). The final layer would comprise commentary in relation to application of the relevant recommendations and additional best practice commentary in areas where issuers may choose, but are not required, to report against.

Smaller-to-medium-sized issuers

I found the responses to the survey smaller-to-medium-sized issuers conducted by TNS easier to access.

The key messages derived by the TNZ survey included:

• The overall response to the initiative is positive as there is a desire for an up-to-date single source set of governance reporting guidelines and a positive reaction to the tiered approach, incorporating a ‘comply or explain’ requirement.
• The notion of incorporating ‘best practice’ commentary is polarising; as while for some it will provide good guidance in developing governance protocols, others fear their non-compliance with the best practice may suggest their apparent sub-standard practice in the eyes of investors.

TNS also managed to band the level of support for reporting requirements per se into:

• Advocates – identify and co-opt into the engagement process with aim of their informing and persuading of others.

• Potentials – drive up awareness of initiative, develop engage activities and communications and highlight key benefits of the initiative.

• Functionals – focus on communicating the key mid-and long-term benefits to the business of good governance, good reporting regimes and the resultant increase of the company’s value and attractiveness to investors.

• Antagonists – develop arguments to close down and challenge their anti-governance/bureaucracy stance.

Other interesting findings were:

• Ethical standards: Most companies spoken to have codes of conduct/ethics already in place that expanded beyond the board/executives, so the extension of the current NZX code is acceptable, including dealing with whistle blowing. For all the presence of a code/policy and its disclosure are thought to be sufficient and this could be made readily available on the company website. Unless for exceptional circumstances additional reporting around this is not considered necessary by any respondents.

• Board composition and performance: The principles of independence, mix of skill sets and diversity are all taken as positive and largely agreed with. But then discussion moves onto the realities of the New Zealand market and its relatively small talent pool. Appointing the ‘right person for job’ is the over-riding desire with all spoken with and causes a resistance to the notion of fixed quotas on gender, race, and disability. This is added to by the smallest issuers spoken with in relation to the realities of board make up with companies with small boards of 3-5 directors and their likely personal involvement in companies in the early stages of their development. (Overall there is a desire for less prescription and more guideline in this area in order to increase the chances of compliance across all issuers).

• Board committees: The overall stance for most is that the current set of recommendations of committee composition and the requirement for charters worked well and benefitted from the ‘unless constrained by size’ exception. So there is a resistance to further prescriptive recommendation on the number and make up of committees. Flexibility for small companies – in terms of numbers of committees, committee role sharing – is a strong requirement. All acknowledge the importance of remuneration committees and acknowledged the need for the requirement to continue, but again wanted flexibility around committee composition.

• Reporting and disclosure: Continuous disclosure is accepted as a fundamental requirement for listed companies seeking investment, so the writing and publishing of the company’s policy is thought to be acceptable for the sake of clarity. The current mandatory requirements are thought to cover this adequately. There is discussion on the nature of ‘publishing’ with a call for a lot of policy and disclosure information to be located on company websites rather than the in annual reports for efficiency and cost reasons. There is a resistance to the wholesale introduction of recommendations for non-financial reporting, including ESG disclosure, as it is thought to be an area of relative importance –critical to some seeking investment, peripheral to others –so the freedom to choose the level of disclosure should stay with the company.

• Remuneration: Interestingly, given the diversity of the sample base, no one feels there is a need for further more detailed disclosure of executive remuneration. This is partly driven by concerns of the competitive commercial sensitivity of the information and partly by the concerns of the small talent pool in New Zealand and the desire to get the best people available from that small pool. Policy setting is fine, it is the specific details of the remuneration packages themselves that are sensitive…in short, the dollar amounts. Remuneration consultants are not widely used by companies among the sample base.

• Risk management: There is widespread acceptance of the need for boosting the NZX policy and reporting requirement of issuers around general risk management:

o Key risks
o Risk auditing
o Staff share dealing

However, there is variability of response on the requirement of ESG reporting based on the nature of the companies’ business. There is an acceptance by some that investors would be extremely interested in ESG information; and for others the fear that they may have onerous reporting requirements made on them for metrics that are irrelevant for their investors.

• Auditors: There is consensus around the current level of regulation of the auditing process and support for the external auditor attending the AGM and auditor fees being reported. Whilst not a strongly held view, issuers think the five year rotation is a sound one and long enough to allow auditing firms to develop a sound understanding of the business, to allow partner succession.

• Shareholder relations: All respondents accept the importance of having sound shareholder relations programmes, but because of the variability in the size and make-up of the firms’ shareholder base there was a concern among the smaller companies of prescriptive requirements adding complexity and work load to their reporting/shareholder management. For those dual-listed companies this is not a concern as they already have additional requirements which they handle. Should the guidelines be developed the smaller companies feel more comfortable with best practice commentaries being involved, rather than recommendations.

• Stakeholder interests: Most respondents admit that this is a vague area and the relevant stakeholder map is largely idiosyncratic to each company. It is an area thought to be more relevant to public bodies and NGOs, rather than commercial organisations whose primary reporting responsibility is towards shareholders. In addition, a number believe the issues touched on are covered by the ethical standards requirements of the firm. The exception to this is those organisations whose licence to operate requires government and community acceptance. In which policy and reporting requirements are considered important.

Further information

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