The Financial Markets Authority (FMA) and the OECD are updating their corporate governance guidelines from 2004.
The FMA’s revised guidance, released before Christmas, is a stop gap measure as FMA will conduct a second review to incorporate changes from the OECD update, which is scheduled to be completed later this year.
The changes from the FMA are modest in scope and designed to catch up with trends and developments since 2004 pending the more substantive review to capture the OECD updates.
Although no legislation requires the FMA guidelines to be followed, FMA encourages their application by a range of organisations, including listed issuers, Crown organisations and not-for-profits. Given this broad intended audience, the guidance is necessarily ‘high level’ rather than prescriptive and not all of it will be relevant to every organisation.
Accordingly, FMA suggests boards explain to their stakeholders how they apply the guidelines rather than ‘comply or explain why not’. This contrasts with the corporate governance codes of NZX and ASX, which listed issuers must comply with or explain why not.
FMA notes that where detailed reporting is already required under another corporate governance code, there may be no need to provide additional information against a particular FMA principle.
NZX intends to consult on changes to its corporate governance code later this year.
The FMA changes include:
- emphasis on the need for board “ownership” of corporate governance processes and continuous review and monitoring – the FMA notes that an unhealthy “tick the box” approach can arise when boards delegate responsibility for compliance wholly to management
- a nod to the increasing use of website portals for investor relations with a suggestion that these can be used for real time compliance reporting on governance principles (together with, or instead of, the traditional approach of reporting in the annual report)
- some more detailed recommendations on board composition, including how to secure the right mix of skills, capability and independence (and what independence means in practice) and a reflection of the developing market practice of adopting specialist board committees focussed on workplace health and safety
- a discussion of the need for better risk management and regular communication to investors around risks and risk management strategies (which is particularly germane given the increasing focus of New Zealand’s securities law on ongoing reporting, as opposed to one-off, point of sale disclosure, which will be relevant to issuers looking to take advantage of new, “low doc” concessions for capital raisings), and
- an increased focus on business ethics and diversity issues for boards.
A particularly welcome addition is greater recognition by the FMA that corporate governance processes must be “right-sized” for the circumstances of particular firms – there can be no one size fits all approach.
Overall, the FMA’s changes are well short of revolutionary, but represent a much more up to date iteration of corporate governance thinking.
The OECD principles are a public policy instrument intended to assist governments and regulators in their efforts to evaluate and improve the legal, regulatory and institutional framework for corporate governance. They also provide guidance for stock exchanges, investors, corporations and others with a role in the process of developing good corporate governance.
The OECD’s draft review proposals reflect a preoccupation with the increasing dominance of large institutional investors, the trend towards cross-border listings and the conflicts of interest inherent in the fact that most of the large stock exchanges around the world are now publicly traded companies charged with both a profit maximising and a regulatory function.
Those recommendations of most interest or relevance in a New Zealand context include:
- that fairness be added to the promotion of transparent and efficient markets as values corporate governance should promote (a formulation which will be familiar as one of the key purposes of the Financial Markets Conduct Act 2013)
- that institutional investors (mutual funds, pension funds, insurance companies and hedge funds) should be required to disclose how they exercise their votes at shareholder meetings and should be encouraged to sign up to “stewardship codes” covering their engagement with the company board and management
- that human rights be added to business ethics and the environment as items for non-financial reporting, and
- that where a company has a policy to pursue “aggressive tax avoidance”, this should be identified as an issue for board members in relation to the duty to act in good faith (the OECD notes that jurisdictions are increasingly demanding that boards oversee management tax planning strategies to discourage “practices that do not contribute to the long term interests of the company and its shareholders, and can cause legal and reputational risks”).
In relation to shareholder rights, the proposals revolve around two broad themes:
- the potential for electronic technologies to promote shareholder democracy, and
- stronger requirements around the disclosure of remuneration arrangements for directors and senior executives. These include the promotion of different forms of “say-on-pay” votes (whether binding or advisory) as vehicles to convey shareholder sentiment and, for equity based schemes, a requirement that any material changes be subject to specific shareholder approval.