The NZX released its updated Corporate Governance Code (NZX Code) on 9 May 2017.

 

This is the first update to the NZX Code since 2003 and is a significant step change for corporate governance reporting in New Zealand.

 

The NZX Listing Rules require listed companies to provide the NZX with a statement on its corporate governance reporting. The statement must disclose the extent to which the issuer has followed the Corporate Governance Best practice Code during the reporting period.

 

The disclosure of an issuer’s compliance with the NZX Code is intended to be flexible and can be:

 

• in the annual report – in which case, the NZX recommends the statement and related disclosures should be in a clearly labelled corporate governance section; or

 

• on its website – disclosures should be clearly presented and centrally located on, or accessible from the landing page of the website. The link should be easy to locate, prominently displayed in a category such as ‘About Us’ or ‘Investor Centre’; or

 

• a combination of both reporting in the annual report and cross-referencing the website.

 

The NZX Code follows a “comply or explain” approach. Listed companies must comply, or provide a cogent reason why they are not complying. Similar codes operate in Australia, Singapore, South Africa, Brazil, the UK, Germany, The Netherlands, Sweden, Austria, and several other continental European countries.

 

The NZX Code significantly expands the disclosure requirements for remuneration. Specific disclosures about non-executive director remuneration will, if followed, be more useful than Australia’s statutory requirements. While Australia’s requirements are to report how much a NED is to be paid, the New Zealand requirements seek an explanation of how NEDs are paid. Specifically:

 

• NED remuneration proposed for shareholder approval should be clearly explained so shareholders understand why directors are being paid a particular amount as compensation for their contribution to the issuer;

 

• The disclosure should make clear the fees proposed to be paid to individual directors, including a separate explanation of any amounts payable for committee work.

 

• The disclosure should not be limited to a total remuneration pool.

 

• Actual director remuneration should be clearly disclosed to shareholders in the issuer’s annual report, including a breakdown of remuneration for committee roles and fees and benefits received for any other services provided to the issuer.

 

• Disclosure is also required for executive remuneration policy.

 

Significantly, other than for the CEO, specific levels of executive remuneration need not be disclosed.

 

The commentary indicates that it is expected there will be an explanation of the basis on which fixed remuneration is set. While this could be addressed with commentary such as “fixed pay is set by reference to the market median” the commentary is at pains to make clear that disclosures should be transparent. Therefore, statements as exemplified above will be insufficient. To meet the transparency requirement would probably mean further disclosure as to the sample of companies used for comparative purposes, whether it was based on a specific job matching method or a generalised job sizing method, and how, if at all, an incumbent’s experience and performance are taken into account.

 

Transparency will also be required in respect of performance pay, with the commentary noting that it “should be linked to clear targets aligned with the issuer’s performance objectives and appropriate to its risk profile”. This will take some interpretation, but the inference is that performance requirements will have to be disclosed.

 

Similarly, “equity-based remuneration schemes should be carefully designed to support a long term approach and not promote undue risk taking”. The inference is that there should be a discussion of the company’s long-term strategy, and how equity-based remuneration supports it, and controls for excessive risk.

 

Remuneration consultants should be “independent”, defined as not being unduly influenced by management and reporting directly to the board. It is likely that companies will need to explain the board’s governance process to ensure that it receives independent advice on remuneration matters. In a departure from Australia, the commentary suggests that if there are public statements that particular executive remuneration outcomes are the result of consultant advice, then disclosure is warranted on the nature of the advice and what was actually advised. So, the rather tenuous and oft-tendered fall back excuse of “it was the remuneration consultant’s fault” will have to be backed up. Where would we be if, at confession, the “devil made me do it” had to be backed up with a description of the devil’s recommendations and the size of pitchfork used to prod the sinner into reluctant action? Probably a lot more hail Marys….

 

The NZX Code specifically requires issuers to disclose the remuneration arrangements in place for the CEO in the annual report. This should include disclosure of the base salary, short-term incentives and long-term incentives and the performance criteria used to determine performance-based payments. This should include actual policy (in practice, this will probably be integrated into the policy disclosure for other executives), and “actual” remuneration.

 

In a major get-out clause (in response to several submissions), the disclosure in relation to performance hurdles need not disclose the precise details of targets due to “commercial sensitivity”.

 

Since the “comply or explain” basis is not a statutory standard, the commentary notes that “Every issuer should ensure that it addresses any privacy concerns and issues around the disclosure of the CEO’s remuneration by obtaining the consent of the CEO to the disclosure on an annual basis or including consent to such disclosure in the CEO’s employment agreement.” Interestingly, this means an issuer can provide a good reason for not complying if, for example, a CEO with significant negotiating power withholds consent.

 

The NZX Code also has several interesting requirements for ESG reporting that should position NZ companies well for global ESG rating agencies (e.g. Sustainalytics and MCSI).

 

The final NZX Code reflects the broad stakeholder views in New Zealand’s capital markets and reduces fragmentation between NZX’s Code and other existing corporate governance frameworks.

 

The updated NZX Code will take effect from 1 October 2017 so that it must be reported against for reporting periods ending 31 December 2017 and beyond.

 

Issuers are encouraged to adopt the recommendations on a voluntary basis earlier if they wish.

 

Overall, the Code is a major advance in disclosure and governance standards, particularly on executive pay, that should provide institutional investors with greater assurance on NZ listed company governance and risk.

 

The final NZX Code, which includes an explanatory paper about the changes, can be found HERE.

 

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