New Zealand’s security exchange, the NZX, is well into the second round of consultations for a revision of its Corporate Governance Code.

To keep the NZX Code “fresh”, NZX announced its intention to establish a Corporate Governance Institute to assist in the recommendation and regulation of corporate governance practices.  The intent is for the Institute chaired by Hamish McDonald (a former NZX executive) to be established in November 2022.

Trans-Tasman membership is proposed with the inclusion of representatives of the Australian Investor Relations Association, Chartered Accountants Australia and New Zealand and the ASX Corporate Governance Council.

The director from the ASX Corporate Governance Council is proposed as a “cross-over director” to ensure alignment between the NZX and ASX, especially as “issuers on the NZX Main Board compete for capital in the context of the Australasian capital markets”, and as such the NZX Corporate Governance Code should reflect this.

The announcement can be found HERE.

The Code itself is interesting. While well into its second round of consultation, there are a number of aspects that probably need more careful consideration.

On committees, the NZX appears open to the idea that executive directors be able to serve on remuneration committees (see link to NZX Corporate Governance Workshop 2 slides HERE.)

While the ASX Corporate Governance Code does not restrict executive directors from acting as members of a remuneration committee, it notes that if a remuneration committee includes an executive director the committee should consider the potential conflicts of interest that may arise (i.e. Like a wolf serving as a sheep dog?). It would be remarkable, indeed, if the NZX Code did not explicitly recommend against this, with commentary noting that an executive director can provide input and recommendations to such a Committee rather than be a member . Keep in mind that under the NZX code a company need not follow a recommendation; all it need do is explain why the wolf would be a good sheep dog (perhaps being empathic helps..?).

On remuneration, NZX proposes to amend Code recommendations 5.1 and 5.2 so that they more clearly relate to director remuneration and executive remuneration respectively. It is also recommending that issuers disclose how their remuneration arrangements align with the issuer’s strategy and performance objectives. Currently, most NZX annual reports outside of the top 10 fall short on this disclosure. Further, there is a suggestion that the commentary require an explicit consideration of non-financial performance measures (aka ESG measures). To our mind there is a danger of going down APRA’s path whereby APRA requires non-financial measures of performance but does not require financial measures. At the very least the NZX code should acknowledge both financial and non-financial measures (versus the perfectly acceptable all-encompassing single word “measures”).

A departure from the Australian standards is that where an issuer has sought independent advice in relation to the design of its remuneration arrangements for directors, NZX may encourage issuers to provide a summary of that advice, through amendments to the Code commentary. While the Code is a “comply or explain”, permitting a company to opt out of disclosure, some NZX boards may be reluctant to seek advice, as they may choose not to follow it, and find themselves having to explain why. In addition, how frank can the advice be if, in the advisors analyses and observations, it has to consider why current remuneration is not effective or even contrary to shareholders’ and the company’s interests? To what extent can the advice reference commercially sensitive business strategies and data, and how can advice be framed to further a commercially sensitive strategy?

NZX is also proposing that issuers within the S&P/NZX 50 Index and with more than 50 employees consider providing gender pay gap reporting information. This is not the same as equal pay (see our article HERE.) This suggestion in effect follows common New Zealand voluntary disclosure practice. Philanthropic foundation, the Clare Foundation, has funded a pay gap campaign and public registry that aims to bring New Zealand’s gender pay gap into the spotlight. On International Women’s Day (IWD) a ‘pay gap’ registry called, ‘Mind the Gap’, was launched, where New Zealand businesses are encouraged to register their gender and ethnicity pay gaps publicly.

The NZX code will also require expansive disclosure of ESG matters, including climate change. On diversity it will progress beyond Australian standards to consider diversity beyond gender.

The second round consultation for the NZX Governance Code draft can be found HERE.

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