NZX governance review significant step forward

​The NZX review of its Corporate Governance Code, now in the final stages of what has been a meticulous process, is shaping up as a big event.

NZX received 45 written submissions and interviewed 15 small to medium sized issuers.  It has accepted the substance of the responses, giving some issues a shove, some a push, some a gentle nudge and setting some aside for later.

The result is a fairly substantial revision, which will help raise governance standards, sometimes in ways that will be challenging for some organisations, but which will be manageable at boardroom level and positive for ‘NZ Inc’.

As signalled, the consultation paper sets out a three-tiered structure to identify the different levels of compliance required. 

At the top tier are eight Principles, closely based on those contained in the Financial Markets Authority Handbook.  This alignment will assist consistency and go some way to address the fragmentation associated with having competing governance frameworks – a key issue for market participants. 

Sensibly, FMA Principle 9 (relating to stakeholder interests) is not included.  Rather, its content is addressed under Principles 4 (reporting and disclosure) and 8 (shareholder rights and relations).  This was a change which Chapman Tripp argued for and will remove some redundancy from the Code.

Each Principle is supported by “recommendations” and “commentary”. 

Recommendations apply on a "comply or explain" basis.  New Listing Rule 10.4.5 (i) will require issuers to state on their website each year whether and to what extent they have followed each recommendation - and, where they have not, why not, for how long, any alternative governance practices used in lieu, and whether these have been approved by the board.  This is considerably more specific than the requirements of the present rule.

Compliance will not be mandatory for commentaries, a point subtly reinforced by NZX’s decision (in response to submissions) to change the term to “commentary” as opposed to “best practice commentary”.  But they still reflect encouraged behaviours and will drive investor expectations, so the chamber of the gun is not completely empty.

Key areas of focus 

There are three key areas of focus: diversity; environmental, social and governance (ESG) reporting; and remuneration.


The mandatory requirement to disclose a quantitative gender breakdown will remain, but will be supported by a new recommendation that all issuers should adopt and disclose a diversity policy which addresses gender diversity “at a minimum”.  We welcome this change.

Status: push.


No specific requirements are proposed around ESG, health and safety (H&S) or cyber security disclosure but the proposed commentary notes their significance.  And there will be a “comply or explain” requirement to have management policies and procedures in place relating to “key risks” and to regularly monitor performance in relation to these.   

NZX is also planning to develop guidance for New Zealand issuers based on the Sustainable Stock Exchange Initiative and to give its imprimatur to the alternative Global Reporting Initiative (local adherents of which include Z Energy).  We think this change strikes the right balance.

Status: nudge.


There are three recommendations which respond to investor calls for greater transparency:

  • issuers must have a formal and transparent method to recommend director remuneration packages to shareholders and must clearly disclose actual director remuneration
  • a remuneration policy covering directors and senior executives must be published and, in relation to executive remuneration, must outline the relative weightings of remuneration components (e.g. base, short-term incentive, long-term incentive), relevant performance criteria and any discretion to make other payments, and
  • in addition to the above, the specifics of the CEO’s pay must be disclosed, including base salary, short and long-term incentives and the basis for determining any performance-based elements.

We agree with these changes and consider the proposed reporting regime for the CEO strikes an appropriate middle course between the limited disclosure requirements in the Companies Act and the turgid remuneration reports required in Australia. 

More transparent CEO remuneration reporting should also better inform investors, and help ensure media commentary, such as the Business Herald annual executive pay survey, can better distinguish between base salary, incentive payments and retirement pay.

Status: shove.

Other features

Other notable recommendations are:

  • have and publish a code of ethics (although there will be no need to report compliance against it)
  • have and disclose a staff and director share dealing policy
  • directors to undertake appropriate training so that they are up to date with how best to perform their duties
  • formal and regular assessments of board, director and committee performance
  • board committees to have written charters, and those charters, together with membership and attendance records, to be disclosed
  • have and disclose a continuous disclosure policy (common practice already, but not universal), and
  • auditors to attend and be available to answer questions at annual meetings (customary but not currently required).

We think these changes are uncontroversial.

Still in the in-tray

Board independence

The NZX is not promoting a requirement that boards must have a majority of independent directors, but it has adopted the Institute of Directors proposal that there must be a preponderance of non-executive over executive directors.  It has also indicated that it will revisit this issue in the context of its coming review of the Listing Rules (and, in particular, the wide definition of “independent”).

Chapman Tripp’s view is that the definition of “independent” is so broad that a requirement for majority independence would pose problems in the small New Zealand market.  Accordingly, we welcome the proposal to review the definition before there is any policy movement in this area.

A single code

We have for some time advocated the creation, by the various governance agencies in New Zealand, of an umbrella organisation equivalent to the ASX Corporate Governance Council which could agree on (and monitor) a single governance framework.

That is obviously beyond the NZX’s authority to deliver and beyond the scope of the review.  And we sympathise with NZX’s desire to let these proposed governance changes bed down for two years before going back to the drawing board.  But we are encouraged by its declared willingness, at that point, to reconsider the idea of an external advisory group to provide input into the update.

That would be a good start.

Next steps

The submission deadline is 14 October 2016.  The NZX wants the Code finalised this year for implementation in 2017.  We encourage you to have your say.  In the Appendix below you will find the eight Principles and the associated recommendations. 


Principle 1 - Ethical Standards

Directors should set high standards of ethical behaviour, model this behaviour and hold management accountable for delivering these standards throughout the organisation.

1.1 The board of an issuer should develop a code of ethics (to be regularly reviewed by the board) to which the issuer’s directors and employees should adhere.  A code should be communicated to the issuer’s employees and training should be provided regularly.  It should outline procedures for internal reporting of any breach of ethics, and describe the issuer’s expectations about behaviour, namely that every director, executive and employee:

(a) act honestly and with personal integrity in all actions

(b) declare conflicts of interest or not enter into any arrangement that would conflict with the issuer’s best interest

(c) undertake proper receipt and use of corporate information, assets and propert

(d) give proper attention to the matters before them, particularly for director

(e) act honestly and in the best interests of the  issuer as required by la

(f) adhere to any procedures around giving and receiving gifts, an

(g) adhere to any procedures about whistle blowing.

1.2 An issuer should have a staff share dealing policy which extends to directors.  This policy should be disclosed.


To ensure an effective board, there should be a balance of independence, skills, knowledge, experience and perspectives.

2.1 Issuers should clearly distinguish and disclose the respective roles and responsibilities of the board and management

2.2  Issuers should have a formal and transparent method for the nomination and appointment of directors to the board

2.3  Issuers should enter into written agreements with each board member establishing the terms of their appointment

2.4  Reporting should include information about each director, including a profile of experience, length of service, independence and ownership interests

2.5  An issuer should develop a diversity policy, which at a minimum should address gender diversity

2.6 Directors should undertake appropriate training to remain current on how to best perform their duties as directors of an issuer

2.7  The board should establish a formal procedure to regularly assess director, board and committee performance.


The board should use committees where this will enhance its effectiveness in key areas, while still retaining board responsibility.

3.1  Membership on the audit committee should comprise solely non-executive directors of the issuer.  The chair of the audit committee should not also be the chair of the board

3.2  Directors who are not members of the audit committee and employees should only attend audit committee meetings at the invitation of the audit committee

3.3  An issuer should establish a remuneration committee

3.4  An issuer should establish a nomination committee to recommend director appointments to the board.  At least a majority of the nomination committee should be independent directors

3.5  An issuer should consider whether it is appropriate to have any other committees.  All committees should operate under published written charters.  An issuer should identify the members of each of its committees, and periodically report member attendance.


The board should demand integrity in financial and non-financial reporting and in the timeliness and balance of disclosures.

4.1  An issuer’s board should develop and publish a written policy in relation to continuous disclosure

4.2  An issuer should make its code of ethics, board committee charters and other key governance documents available to interested investors and stakeholders

4.3  An issuer should provide both financial and non-financial disclosure and should indicate how non-financial targets are measured.


The remuneration of directors and executives should be transparent, fair and reasonable.

5.1 Every issuer should have a formal and transparent method to recommend director remuneration packages to shareholders.  Actual director remuneration should be clearly disclosed

5.2 Issuers should publish a remuneration policy dealing with remuneration of directors and senior executives.  The remuneration policy in relation to executive remuneration should outline the relative weightings of remuneration components and relevant performance criteria

5.3 Issuers should disclose the remuneration arrangements in place for the CEO.  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.


Directors should have a sound understanding of the key risks faced by the business.  The board should regularly verify that the entity has appropriate processes that identify and manage potential and relevant risks.

6.1  An issuer should have appropriate policies and procedures in place to identify and manage the key risks facing their businesses and the issuer’s board should receive and review regular reports on the operation of the risk management framework.


The board should ensure the quality and independence of the external audit process.

7.1  The board should establish a formal and transparent framework for the issuer’s relationship with its auditors, including:

(a) to establish a formal and transparent procedure for sustaining communication with the issuer’s independent and internal auditors

(b) to ensure the ability of the auditors to carry out their statutory audit role is not impaired or could be reasonably impaired

(c) to address what, if any, services (whether by type or level) other than their statutory roles may be provided by the auditors to the issuer, and

(d) to provide for the monitoring and approval by the issuer’s Audit Committee of any services provided by the auditors to the issuer other than in their statutory role.


The board should respect the rights of shareholders and foster constructive relationships with shareholders that encourage them to engage with the entity.

8.1 An issuer should have a website where investors and interested shareholders can access information and key corporate governance information about the issuer

8.2 An issuer should allow investors the ability to easily communicate with the issuer, including providing the option to receive communications from the issuer electronically.

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Related topics: Financial Markets Authority; Financial Markets Conduct legislation

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