The NZX yesterday released its updated Corporate Governance Code (New Code), which will replace the existing Best Practice Code set out in the Appendix to the NZX Listing Rules (Old Code). The New Code has been developed from an initial discussion document that was released in November 2015, targeted consultation and a further paper released in August 2016. While there have been some final changes from the draft in the 2016 consultation paper, the overall package of the Code comes as no surprise. DLA Piper welcomes the changes which will bring the corporate governance obligations of listed issuers in New Zealand in line with international best practice.
As part of their annual reporting requirements, issuers are currently required to state their corporate governance policies, practices and processes either in the annual report or on the issuer's website. They are also required to comment how these differ materially from the Old Code which sets out specific principles relating to code of ethics, directors and committees.
This reporting requirement will be replaced on 1 October 2017 by new requirements in the Listing Rules, which will require an issuer to explain how, and the extent to which, it has followed recommendations set out in the New Code. If any of the recommendations have not been followed, the issuer is required to state the period for which the relevant recommendations have not been followed, its reasons for not following the relevant recommendations, and any alternative governance practice adopted.
The New Code - a change in approach
The New Code follows a different style from the Old Code and aligns with the tiered approach followed by ASX in its Corporate Governance Principles and Recommendations (ASX Governance Principles) and FMA’s Principles for Corporate Governance (FMA Governance Principles). As explained in the 2015 NZX discussion document, in a tiered approach there are principles that outline the overarching concept for each topic and that are supplemented by recommendations outlining in more detail the particular matters that are expected of issuers in relation to the principle discussed.
It is these recommendations that effectively form the Code that must be met and reported on, on the 'comply or explain basis' referred to above. Finally, there is commentary in relation to the application of the relevant recommendations and additional best practice that is voluntary to report against.
The structure sets expected minimum standards but is flexible enough to assist compliance by listed issuers of different sizes and nature.
The reasoning behind this new regime is that investors should be able to receive an appropriate level of information on governance arrangements so that:
- they and other stakeholders can have a meaningful dialogue with the Board and management on corporate governance matters;
- they can use such information to help make decisions on how to vote on particular resolutions; and
- they can factor that information into their decision on whether or not to invest in the issuer.
Without going into too much detail, the key principles in the New Code that closely follow the FMA Governance Principles are:
Principle 1 – Code of Ethical Behaviours
Principle 2 – Board Composition & Performance
Principle 3 – Board Committees
Principle 4 – Reporting and Disclosure
Principle 5 – Remuneration
Principle 6 – Risk Management
Principle 7 – Auditors
Principle 8 – Shareholder Rights & Relations
- In terms of content, and by using the Principle 1 as an example, the principles and commentary provide more flavour as to how an issuer's code of ethics should be used rather than what the code of ethics should contain. In particular, the commentary guides issuers with what happens once a code of ethics is in place, i.e. how it should be communicated, how breaches should be handled and when it should be reviewed.
- The recommendations focus heavily on having documentation in place - for example having in place a Board Charter, having written agreements for director appointments, ensuring there is a continuous disclosure policy and documenting what protocols should be followed in a takeover, amongst others. The takeover protocols are a new requirement that was not previously referred to in earlier drafts of the New Code.
- A key theme is access to information. Principles 4 and 8 in particular require information to be disclosed and available to investors through an issuer’s website. The Old Code does not contain requirements on this although the NZX Listing rules include some mandatory reporting requirements. The New Code recommends disclosure of key documents and the commentary indicates the following should be available on an issuer’s website: code of ethics; financial product dealing policy; board and committee charters; diversity policy (or a summary of it); remuneration policy; and continuous disclosure policy. It is also recommended that issuers have a modern communication framework in place so that investors can communicate with them electronically and so that other shareholder related information, for example in relation to the annual meeting, is available online.
- We are particularly pleased to see new recommendations relating to diversity - including that that an issuer have a written diversity policy and set measurable objectives for achieving diversity (which, at a minimum, should address gender diversity). The recommendation also provides that an issuer should assess annually both the objectives and progress made toward achieving them.
- Risk management was identified as significant gap in the Old Code. The New Code recommends a general requirement to have a framework and regular reporting as well as a framework to manage existing risks and report on material risks facing the business and how these are being managed. The New Code includes a specific recommendation for an issuer to disclose how it manages health and safety risks and that it should report on these risks, performance and management. The commentary acknowledges that the necessity for a health and safety committee will depend on the size and nature of the business. Interestingly, cyber risk was specifically referred to in the commentary in earlier draft versions of the New Code but is not mentioned in the final version of the New Code.
- Other new concepts include recommendations that non-financial disclosure include consideration of exposure to environmental, economic and social sustainability risks. They also include other key risks and that issuers explain how they plan to manage these risks and how operational or non-financial targets are measured. This should include consideration of material environmental, social and governance (ESG) factors and if issuers report on ESG, the commentary suggests that should be done in accordance with international reporting standards (for example the global reporting initiative guideline or integrated reporting). The commentary further notes that smaller issuers may consider it not appropriate to adopt a formal ESG framework and may instead select other non-financial matters to report on.
- Finally, a hot topic throughout consultation was transparency of remuneration. Current remuneration reporting is minimal and puts New Zealand behind global standards. By comparison, the Australian requirements in the ASX Corporate Governance Principles and Recommendations are extensive. As noted in the 2016 consultation paper, there is some concern the Australian approach is too much. Therefore, the recommendations in the New Code in relation to remuneration seek to balance interests of investors with commercially sensitive information so that only the information most useful to investors will be disclosed. In addition, because shareholders are responsible for approving director remuneration, the recommendations also focus on recommending director remuneration to shareholders in a transparent manner so that they can understand why directors are being paid a particular amount.
Issuers must report against the New Code for financial years ending after 1 October 2017. NZX is, however, encouraging issuers to comply earlier through a class notice that deems issuers to have met current obligations in the Listing Rules if they report against the New Code in the manner prescribed by the class notice.