The updated NZX Corporate Governance Code, released this morning, has gathered strength as it went through the process. It significantly advances shareholders' rights and achieves much closer alignment with the Financial Markets Authority corporate governance handbook.
The new Code will apply for all reporting periods from 1 October 2017, meaning that the first issuers required to report against it will be those with a 31 December balance date. Earlier adoption is available at will.
This is the most significant upgrade since the original Code was published in 2003 and – although some matters have been left to the broader review now underway of the NZX’s Listing Rules – it represents a big step forward, particularly in the disclosure area and in the promotion of shareholder participation and democracy.
The NZX has gone further than many might have expected in the push for ESG, health and safety and diversity reporting.
If an issuer has not adopted a particular recommendation, it must explain why adoption was not appropriate and the alternative measures it has in place. That explanation should avoid being short or uninformative. It will not be enough, for example, to say that the issuer “does not consider the recommendation relevant". The reasons why will have to be given together with any other steps taken.
This provides each issuer with the flexibility to tailor its approach to corporate governance to best fit its particular circumstances while also ensuring appropriate compliance.
We have highlighted some of the key recommendations below, together with our comments. A full list of the principles and recommendations can be found here.
Board composition and performance
An issuer should have a written diversity policy which includes requirements for the board or a relevant committee of the board to set measurable objectives for achieving diversity (which, at a minimum, should address gender diversity) and to assess annually both the objectives and the entity's progress in achieving them. The issuer should disclose the policy or a summary of it.
This is an improvement upon the current diversity requirements introduced to the NZX Listing Rules in 2012, which require only a quantitative breakdown of the gender composition of directors and officers and a statement evaluating the issuer's performance against its diversity policy (if applicable).
Financial reporting should be balanced, clear and objective. An issuer should provide non financial disclosure at least annually, including considering material exposure to environmental, economic and social sustainability risks and other key risks. It should explain how it plans to manage those risks and how operational or non-financial targets are measured.
Issuers should determine the appropriate level of non-financial reporting to form part of their disclosure regime. In particular, if issuers wish to adopt a formal framework for their ESG reporting, NZX has suggested they should use a recognised international reporting initiative (such as the Global Reporting Initiative guidelines or Integrated Reporting). But NZX has acknowledged that smaller issuers may choose to report on ESG factors in a more holistic way.
An issuer should disclose the remuneration arrangements in place for the CEO in its 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.
Submissions were strongly divided on this issue so it may prove a controversial decision.
An issuer should disclose how it manages its health and safety risks and should report on their health and safety risks, performance and management.
The inclusion of reporting on health and safety risks as a stand-alone recommendation highlights the importance of boards continuing to focus on this area and reinforces the new health and safety legislation.
Each person who invests money in a company should have one vote per share of the company they own equally with other shareholders.
It is not entirely clear the mischief that this recommendation is intended to prevent – the commentary only mentions holding votes by polls. If the concern is to ensure that all votes are polled, it may have been more intuitive for the recommendation itself to refer to polls. On the other hand, the NZX may be seeking to avoid a situation like the Snap Inc. IPO which involved investors only being offered non-voting shares. Of course, this would still be possible under the new Code, but the issuer would have to explain why it has adopted this governance structure.
The board should ensure that the annual shareholders notice of meeting is posted on the issuer's website as soon as possible and at least 28 days prior to the meeting.
Currently, issuers are only required to give two weeks' notice before a meeting, so issuers will need to adopt new, speedier internal processes to meet the deadline suggested in the new Code.
No rest for the wicked
After such a momentous review of the Code, issuers may have expected some respite from the regulatory change that has been a constant feature of the past few years. However, as noted above, NZX has signalled that it has left some corporate governance matters to be considered as part of the broader review now underway of the NZX's Listing Rules.
This means that some aspects of the Code may require further refining, in particular in relation to the vexed question of director independence (both as to the definition of independent directors, and how many an issuer is required to have).