Brief Counsel 01 December 2015

Brief Counsel 01 December 2015

NZX to revise corporate governance requirements

NZX has released a discussion document on the corporate governance requirements imposed on issuers.

Submissions are due by 29 January 2016.

What is NZX proposing?

NZX has drawn upon the Financial Markets Authority Corporate Governance in New Zealand Principles and Guidelines, updated in December 2014, and the Australian Corporate Governance Council Corporate Governance Principles and Recommendations.

NZX proposes to implement a corporate governance reporting model that has three levels:

Principles – broad, thematic concepts that are used to organise the more specific materials below them
Recommendations – issuers would be required to comply with these under the revised NZX Code, or explain why not (the model that currently operates in Australia)
Best practice commentary – issuers could choose to report against these additional standards if they wish to meet best practice in all areas, or where a commentary is of particular relevance to them or their industry.
NZX has largely followed the FMA principles, although there are some areas where they have deviated to take an approach that is more relevant for listed issuers.

One point to note is that NZX has left the mandatory corporate governance requirements under the NZX Listing Rules to next year to address – this covers things like the minimum number of independent directors and director rotation requirements. These mandatory corporate governance requirements will need to be complied with by all issuers but there may not be any reporting required, although we will need to watch this space to see what NZX proposes.

Possible first steps towards a more unified approach?

As we have flagged previously (here and here) one of the main issues in New Zealand has been the fragmented approach taken to corporate governance principles and recommendations. In Australia, the ASX Corporate Governance Council represents a wide range of stakeholders and appears to have achieved consensus on appropriate corporate governance requirements for listed issuers.

In contrast, in New Zealand, NZX, FMA and others, such as the Institute of Directors and the recently formed “New Zealand Corporate Governance Forum” (comprising solely of institutional investors), have all published their own guidance. Many of these overlap. Indeed, NZX has largely followed the FMA principles. However, there are still differences between the two codes and any future changes to either may widen the gap.

In an ideal world, FMA (and other stakeholders) would have significant input to the revised NZX corporate governance code, and this could then be the single source of corporate governance requirements for listed issuers in New Zealand.

This could be reflected by amending the FMA principles and guidelines to focus on non-listed issuers, which would ensure that any differences between the two primary regulators in New Zealand would not result in issuers having to reconcile multiple pieces of guidance.

Health and safety and some other hot topics

While many of the suggestions in the discussion paper are unlikely to cause much excitement, there are a few aspects on which NZX is seeking feedback that we expect will provoke some interesting submissions and discussions.

These include:

a possible move towards recommending a majority of independent directors
the extent to which non-financial reporting matters, such as Environmental, Social and Corporate Governance (ESG) reporting, should be recommended or suggested as best practice
more detailed information around CEO and senior executive remuneration, as in Australia, and
querying the extent to which NZX should include managing and reporting health and safety risks, and reporting against ESG risks, within the recommendations or best practice commentary.
We intend to submit on NZX’s discussion paper in the New Year and would be happy to discuss our thoughts on these matters, or assist you with your submission.

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