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NZX seeks feedback on adopting broader FMA guidelines on governance

by Stephen on November 10th, 2015

Last week, NZX published a discussion document to commence the first stage of a review of the corporate governance reporting requirements within the NZX Main Board Listing Rules. NZX is seeking feedback on a proposal to broaden corporate governance rules for main board-listed companies including an extension of the scope of codes of ethics beyond just the board to senior managers and employees.

The review covers reporting requirements under the NZX Listing Rules but not the mandatory requirements (being those in Chapter 3 of the Listing Rules – relating to board composition, independence and rotation – which will be included in a broader review of Listing Rules in 2016). However, because the two are related, NZX has said it would welcome feedback on the mandatory requirements as well.

Alongside those mandatory requirements, the NZX Listing Rules requires issuers to disclose a statement on corporate governance policies and whether they differ materially from the NZX’s best practice code – along with a handful of specific items (including a breakdown of gender composition of both directors and managers, a statement on the company’s diversity policy, and a statement about independent and aligned directors).

The objective of the latest review is to bring those requirements into line with best practice. To this end, it has used the principles in the FMA’s updated corporate governance handbook (December 2014) as its reference point – with the aim of having a single set of high level principles in the New Zealand context.

Most corporate governance reporting regimes are generally tiered according to:

• principles – outlining the overarching concept for each topic;
• recommendations (or guidelines) which outline in more detail the particular matters which are expected of issuers in relation to each principle, which are more prescriptive and must be met on a “comply or explain” basis; and
• commentary – on the application of the recommendations (and additional best practice in areas where issuers may choose, but are not required to report against).

Currently, the Listing Rules require issuers to explain whether and, if so, how the corporate governance principles adopted or followed by the issuer materially differ from the best practice recommendations. NZX proposes to adopt an approach of “comply or explain” as applies in Australia and the UK.

Under the proposed tiered reporting structure of the regime, the requirement to “comply or explain” would apply to the recommendations (i.e. the middle tier) outlined under each principle.

NZX seeks feedback on how to update its current requirements by reference to each of the principles in the FMA handbook as summarised below.

Feedback sought

NZX proposes to conduct the review in two stages, seeking initial feedback on the initial discussion document by 29 January 2016.  NZX then plans to consult on specific changes, which will be developed following consideration of feedback received.

Principle 1: Ethical Standards

On ethical standards, the NZX Listing Rules currently require directors of an issuer to develop a code of ethics with compliance standards and rules for handling conflicts of interest and mechanisms for reporting unethical behaviour. The FMA handbook extends that, saying a code of ethics should apply to senior managers and employees, and publish a report on how the company has fared against the code. NZX also suggests thought be given to procedures for dealing with whistle-blowers.

Principle 2: Composition and Performance

The NZX Listing Rules set minimum requirements for the proportion of independent directors on a board and a requirement for at least a third of them to offer to retire from office at each annual meeting. It also recommends a director not be chief executive and chair at the same time, that board appointments be transparent and that directors receive training and are regularly assessed. Issuers must also give details of gender breakdown and diversity for their board and executives.

The FMA handbook says board roles and responsibilities should be set out in a charter and directors should be appointed through rigorous, formal, processes that the chair should be independent, that the majority should be non-executive, that performance reviews should be extended to specific roles such as the audit committee and the chair. NZX says it wants feedback on changes including a requirement for issuers to enter written agreements with each senior executive and board member.

NZX says it is too early to fully assess the impact of its latest requirements on the topic of gender diversity, and does not support quotas, but welcomes feedback on this topic.

Additional feedback is also being sought on the topic of independence – including whether boards should contain a majority of independent directors and/or an independent chairperson.

Principle 3: Board Committees

Under this heading, the primary focus of attention is the remuneration committee (and whether the existing recommendations in relation to such committees should continue to be subject to a “unless constrained by size” exception).

Principle 4: Reporting and disclosure

On reporting and disclosure, the NZX currently has a broad rule requiring continuous disclosure of material information but the FMA handbook uses stronger language, that boards should have “a rigorous process for ensuring the quality and integrity of financial statements and should provide financial reporting which is clear, concise and effective.” It also calls for effective internal controls, an explanation of directors’ responsibilities in preparing the annual report and a written internal process at board level covering continuous disclosure.

NZX is seeking feedback on whether issuers should have a written policy for complying with their continuous disclosure obligations (and, if so, whether these should be published) and whether any additional recommendations or best practice commentary in relation to non-financial reporting matters (e.g. ESG (environmental and social sustainability) disclosures).

NZX is also seeking feedback on remuneration, including whether issuers should be required to publish their policy for paying directors and senior executives. It also wants feedback on risk management, noting that it doesn’t currently cover that in the NZX code, while the FMA guideline calls for “rigorous processes for risk management and internal controls,” reported at least annually to investors.

Principle 5: Remuneration

NZX is seeking feedback on whether to introduce recommendations that issuers publish a remuneration policy dealing with remuneration of directors and senior executives – and whether senior executive remuneration (incl. the CEO) should include an element of performance (entity and individual) pay.

Principle 6: Risk Management

Here, NZX is seeking feedback on recommendations as to whether issuers should have appropriate policies and procedures in place to identify and manage the key risks facing their businesses – including in relation to managing (and reporting) health and safety risks. A similar question is posed about reporting on ESG risks.

Principle 7: Auditors

On auditors, NZX asks whether the external auditor should be required to attend annual meetings and answer questions from shareholders. Other questions include whether issuers should report to shareholders annually in relation to audit and non audit fees paid to the audit firm – and whether NZX should consider amending its current auditor rotation requirements.

Principle 8: Shareholder relations

The NZX Code has no existing coverage in this area, although a number of mandatory Listing Rules deal with specific obligations relating to shareholder rights. By contrast, the FMA guidelines include recommendations that issuers publish policies for shareholder relations. The ASX Corporate Governance Council’s Principles and Recommendations also provide guidance as to best practice in this area. Consequently, NZX seeks feedback as to whether it should address anything else in this area.

Principle 9: Stakeholder interests

The final topic is stakeholder interests, which is also not currently covered by the NZX Code, whereas the FMA calls for “clear policies for the entity’s relationship with significant stakeholders”.

The NZX notes that, whilst some commentary in this area may be helpful, the relevant stakeholders for a listed issuer would be employees of issuers, suppliers, regulators and government. Whilst saying that it is unclear whether additional recommendations are necessary in this area – NZX again seeks feedback on whether best practice commentary is appropriate.


As I noted in August, about the launch of the NZ Corporate Governance Forum, whilst the launch of the Forum and the publication of its Guidelines was met with supportive comments by the NZX and others, the immediate reaction of many issuers is that each of the interested parties in this area seem to be adding another voice (and another checklist) into a small market. By contrast, in Australia the ASX was instrumental in forming a Corporate Governance Council that is comprised of various businesses, shareholder and industry groups – providing a more cohesive voice on corporate governance matters. The apparent lack of cohesion risks both confusion and diluting the significance of the messages that the various groups wish to convey.

In my view, what the much smaller New Zealand marketplace needs is a unified platform not further fragmentation. Recently, the NZX has been talking about the need to foster more small-to-medium-sized fund managers. Are they to have their own set of requirements? And what about the Shareholders’ Association? No matter how well-researched each group’s efforts may be, a further set of recommendations claiming the high ground as best practice risks devaluing the currency.

Further information

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

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