New Zealand governance rule changes taking shape
12/09/2016
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The New Zealand Stock Exchange (NZX) has released changes being proposed for all NZX companies. The proposed rules, released for consultation on 31 August, have already been through one round of feedback and, while further submissions are being sought, they are expected to be implemented.

These proposals are the first substantive update to the NZX’s best practice code on governance since 2003.

A primary focus of the governance reporting requirements is to provide greater clarity about what is expected of companies in respect of the “comply or explain recommendations”. An amendment to the current listing rules will require companies to identify the governance recommendation they have not followed and, if alternative arrangements are in place, what these are, when they are applied and whether the board has approved such measures.

Currently, mandatory corporate governance requirements are outlined in chapter 3 of the NZX Listing Rules, including in relation to board composition, independence and rotation requirements. Separately, the NZX requires issuers to report on their corporate governance practices by disclosing the following in their annual reports or on their website:

  • A statement of any corporate governance policies, practices and processes, adopted or followed by the issuer;
  •  A statement on whether and, if so, how the corporate governance principles adopted or followed by the issuer materially differ from the Corporate Governance Best Practice Code 3 (NZX Code) or where such statement may be found on the issuer’s website;
  • A quantitative breakdown of the gender composition of the directors and officers as at the issuer’s balance date and including comparative figures for the prior balance date ;
  • A statement from the board providing its evaluation of the issuer’s performance with respect to its diversity policy;
  •  A statement as to which of its directors are independent directors and which are not independent directors, as at the balance date; and
  •  Details of any director who has been appointed under provisions of the constitution and the security holder which appointed that director.

While disappointing to some, the NZX has not proposed that boards should have a majority of independent directors on a “comply or explain” basis.

The NZX is aware of commentary that the size of the New Zealand market is too small to insist on majority board independence. However, the NZX has indicated it has marked this as an issue to be addressed as part of a broader review of the listing rules in late 2016. This could infer that independence may have a stronger standard under the mandatory listing rules than the “comply or explain” governance standards being proposed.

Currently, the NZX Code recommends that directors should take a proportion of their remuneration under a performance based equity scheme. This is out of step with the governance standards in most Western countries and will be dropped.

CEOs and other senior executives of listed companies will have their salaries and reward schemes more clearly published from next year, if proposals put forward by the NZX are adopted. However, the proposals are short on detail on the extent of disclosure. As it stands, the Companies Act requires listed companies to disclose the number of employees earning $100,000 or more in brackets of $10,000- as was the case in Australia last century.

Another proposed measure will require NZX-listed companies to adopt policies to achieve a more diverse representation on their boards.

The proposed diversity rules will require companies to develop a diversity policy, which “at a minimum should address gender diversity” but they will have leeway to tailor that policy for the business.

Other recommendations for rules include the adoption of risk management frameworks on ethical behaviour and more transparent policies on continuous disclosure.

However, the NZX stopped short of imposing ESG (environmental, social governance) reporting standards but has included them in the framework for boards to consider.

Further submissions are being accepted until October 14 with final approval, including sign-off from the Financial Markets Authority, due before the end of the year so that the new rules could apply for the first quarter of 2017.

The consultation paper published on 31 August 2016 can be found HERE.

The 2 November 2015 discussion document on the review of the corporate governance reporting requirements within the NZX listing rules can be found HERE.

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