This article first appeared in the June issue of Boardroom magazine.
Expect a step up in corporate risk disclosure, including environmental and social governance (ESG), as a result of the current review of the NZX Code.
We also expect to see additional director and executive remuneration reporting requirements, at least on a "comply or explain" basis, with a focus on the CEO.
We base this on a representative cross-section of the 45 submissions which are now on the NZX website. The question mark in terms of the NZX response is over how hard it decides to promote change - whether a gentle push or a shove.
The NZX admits in its discussion document, released in November last year, that the lack of specific reference to risk management in the Code is “a significant gap in the current reporting regime”.
That there is room for improvement is widely acknowledged. An NZ Super Fund “snapshot” of the quality of ESG reporting among NZX50 issuers showed “only a handful of very good reporters across their material ESG issues”. And an assessment by the Institute of Directors (IoD) of the NZX Top 20 found that, while 65% were reporting on ESG to some extent, the information provided was “highly variable”.
The NZX has asked:
- should it promote reporting on whether companies have appropriate risk management strategies in place
- should this include ESG risks, and
- should there be specific recommendations or commentary on health and safety (H&S) risks.
To plot the range of opinion on these – and other of the more controversial proposals which the NZX has raised - we focussed on the peak organisations: the IoD, the institutional investor Forum, the Shareholders’ Association and the Listed Companies Association. We also comment on the NZ Super Fund’s submission and on Chapman Tripp’s submission.
The language is important. The NZX is pushing for a tiered regulatory structure under which rules would be compulsory, recommendations would require a “comply or explain” response and best practice commentaries would rely for their effect on voluntary compliance.
Support for the first question was strongly positive across all submitters but feedback on the next two questions was more mixed.
The NZ Super Fund, the institutional investor Forum and the IoD all want the NZX to recommend that issuers report on ESG matters and risks. The Listed Companies Association, the Shareholders’ Association (and Chapman Tripp), by contrast, argue that the guidance should be in the form of a commentary rather than a recommendation.
Despite these differences, there is a high measure of agreement that New Zealand should use generally accepted international ESG reporting frameworks rather than trying to reinvent the wheel and that the risks reported on should be relevant to the business, taking into account its nature and size.
The distribution of attitudes was similar in regard to H&S disclosure, with the institutional investor Forum, the NZ Super Fund and the IoD again at the prescriptive end of the spectrum while the Shareholders’ Association and the Listed Companies Association preferred a more flexible approach with a focus on high risk industries.
The other two review areas we have looked at are board independence and executive remuneration.
The Listing Rules currently require a minimum of two independent directors unless the board has eight or more members in which case the threshold rises to one third of the total. The NZX is asking whether it should consider recommending that in future boards should have a majority of independent directors and/or an independent chair.
The alliances shifted a little on this one. The IoD, the Shareholders’ Association, the institutional investor Forum (and the NZ Super Fund) said yes, on a comply or explain basis, while the Listed Companies Association (and Chapman Tripp) argued that the pool of experienced independent directors in New Zealand was too shallow to make this model work and that instead the NZX should align with the FMA, which recommends a non-executive, rather than an independent, majority.
The institutional investor Forum also advocated that directors serving over nine years should be re-elected annually.
The fault line here was around whether issuers should be required to report on their remuneration policy for directors and senior executives, and whether executive remuneration should include a performance element.
Again, the institutional investor Forum and the NZ Super Fund were the most bullish, this time in company with the Shareholders’ Association, all of which strongly supported both propositions and wanted them to have the force of a comply or explain recommendation.
At the other end of the spectrum was the Listed Companies Association. It said it had “divergent views” among its members as to whether the first question should be addressed as a matter of recommendation or commentary and that – either way – it should be “relatively high level and principle-based”. And it wanted any reporting on performance pay to be voluntary.
The IoD sat somewhere in the middle, supporting a recommendation for question one and a commentary-based response to question two.
Chapman Tripp’s view is that it would be useful to disclose the proportion of executive pay which is performance-based or otherwise at risk– not on an individual basis but grouped within different salary bands.
The Code is intended to be relatively flexible and responsive to individual company circumstances. Mandatory requirements are contained in the NZX Listing Rules, which the NZX plans to update later this year.
Roger Wallis chairs the Chapman Tripp Board. He specialises in corporate, securities and governance law.