The review of the NZX Corporate Governance
NZX has released its final consultation response paper (Paper) following its two-phased consultation on the review of the NZX Corporate Governance Code (Code). The review commenced in November 2021 to assess the effectiveness of the Code’s settings, to take into account stakeholder feedback and to consider international developments in the context of New Zealand market conditions.
We set out below a summary of the proposed changes to the Code that have been discussed in the consultation papers as well as further proposed changes that will be included in the final revised Code for formal approval by the Financial Markets Authority (FMA). These changes are all broadly supported, and further international benchmarking has been conducted in some areas.
It is intended that the revisions to the Code once approved by the FMA will take effect for a listed entity’s first full financial year commencing on or after 1 April 2023, however issuers may elect to voluntarily report against the Code amendments prior to that time. It will be important for Boards and management to be across these changes holistically to work out what it means for them and their disclosure framework.
Summary of changes to the Code
Code framework
While the “comply or explain” framework will be retained, NZX has provided further guidance in the Code as to how non-adoption of a recommendation should be reported, and to encourage issuers to consider providing an index or use sub-headings to ensure that readers of the issuer’s corporate governance statement can easily navigate disclosures in relation to the recommendations.
NZX has also proposed a technical amendment to Rule 3.8.1(b) of the NZX Listing Rules (Listing Rules) to ensure that ‘explain’ disclosures are provided for past reporting periods where an issuer has failed to explain a different approach in the most recent past reporting period.
Principle 1 – Ethics
| Topic | Recommendation/Commentary | Summary of proposed change |
| Training | Commentary to recommendation 1.1 | Expecting issuers to provide training to staff in relation to its code of ethics at least every three years, with the nature of training based on the composition of the workforce. Reinforcing NZX’s expectations around disclosure relating to the frequency of training in relation to its code of ethics and to make this disclosure as part of its corporate governance disclosures (under Rule 3.8.1 of the Listing Rules). |
| Whistleblowing | Commentary to recommendation 1.1 | Suggesting that issuers consider whether it is appropriate to provide access to an external agency for whistleblowing purposes and to note that issuers should ensure they understand their legislative requirements in relation to protected disclosures. |
Principle 2 – Board composition & performance
| Topic | Recommendation/Commentary | Summary of proposed change |
| Director Independence | New recommendation as part of recommendation 2.4 | Encouraging issuers to provide disclosure when a director is determined to be independent despite the presence of one of the factors identified in the Code for a director being non-independent. This is consistent with the approach taken in Australia. |
| Commentary to recommendation 2.4 | Recognising that non-independent directors may continue to provide valuable service to the board of an issuer but that the issuer should ensure that appropriate conflict management arrangements are in place. | |
| Table under Recommendation 2.4 | Clarifying that the listed factors that may affect director independence are not the only factors to consider when assessing a director’s independence. Instead, the board should make a holistic assessment of a director’s independence, which aligns with the approach taken under the ASX Code. Including a new factor in relation to close family ties, to refer to close personal relationships which includes personal, business or social connections reflecting that these relationships can also affect a director’s independence. This inclusion is aligned with the approach taken in Australia. NZX will include further amendments to the Code commentary in this area to clarify the types of relationships that are intended to be captured within this factor. Making technical amendments to the drafting of some of the factors as inclusive considerations including changes to the length of time within which previous relationships with an external audit firm are relevant. Clarifying that where a director’s tenure exceeds twelve years, the director’s tenure may be a factor that precludes the director from being regarded as independent. This change has also been included in the Code commentary. |
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| Board Composition | Commentary to recommendation 2.4 | Noting the value of issuers providing information regarding the succession planning arrangements for the board. Including a cross-reference to recommendation 3.5 which recommends that an issuer should periodically report member attendance at board committee meetings, as recommendation 2.4 only refers to board meetings. |
| New recommendation 2.10 | Split recommendation 2.9. Now only to recommend that the Chair is an Independent Director. Recommendation 2.10 recommends that the chair of the board should be independent of the board’s CEO, whether or not the chair is independent. This amendment is consistent with ASX, SGX and the UK Financial Reporting Council. | |
| Diversity | Commentary to recommendation 2.5 | Encouraging issuers to consider factors beyond gender such as factors including ethnicity, social background, sexual orientation, skills and age when designing their diversity policies and practices in light of the issuer’s size, product or service offering, customer base and the jurisdictions in which it operates. The amendment will also note the importance of fostering a culture of inclusion to enable the delivery of diversity goals. |
| Recommending that an issuer (particularly an issuer within the S&P/NZX 50 Index with more than 50 employees) may wish to provide gender pay gap information either on its website or in its annual report. | ||
| Recommendation 2.5 | Recommending that where an issuer was in the S&P/NZX 20 Index at the commencement of the reporting period, it should have a minimum measurable objective of at least 30% male and at least 30% female directors on its board within a specified period. This is consistent with changes made to the ASX Code in 2019, in relation to S&P/ASX 300 Index issuers. |
Principle 3 – Board committees
| Topic | Recommendation/Commentary | Summary of proposed change |
| Audit committees | Commentary to recommendation 3.3 | Recommending that issuers should disclose the qualifications and experience of audit committee members. This is similar to the approach in Australia. |
| Remuneration committees | Commentary to recommendation 3.3 | Noting that it will be preferrable for issuers not to allow executive directors to sit on an issuer’s remuneration committee, given the conflicts inherent in the relationship. |
| Takeover committees | Commentary to recommendation 3.6 | Recommending that issuers should disclose the composition of its takeover committee, once the committee has been established, and the takeover bid is made public. |
Principle 4 – Reporting & disclosure, and NZX ESG Guidance Note
| Topic | Recommendation/Commentary | Summary of proposed change |
| Principle 4 of the Code | ||
| Financial and non-financial reporting | Recommendation 4.3 and 4.4 | Splitting recommendation 4.3 so that the Code contains bespoke recommendations relating to financial and non-financial reporting, to increase the prominence of the Code’s endorsement of non-financial reporting (now under recommendation 4.4). |
| Location for ESG reporting | Commentary to recommendation 4.4 | Noting that where an issuer provides ESG reporting on its website, that its annual report should include a clear statement as to where that information is available. |
| Non-financial disclosures | Commentary to recommendation 4.4 | Expanding commentary to encourage issuers to report the process by which their non-financial reporting disclosures had been prepared where the disclosures have not been subject to formal review or audit by an external auditor. This reflects amendments made by ASX to the ASX Code. NZX will not be prescribing any particular process for the preparation of non-financial information. |
| Climate-related disclosures | Commentary to recommendation 4.4 | Updating commentary to reflect the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act (CRD regime) that requires mandatory reporting by climate reporting entities including NZX issuers (other than small listed issuers). |
| Topic | Summary of proposed change | |
| NZX ESG Guidance Note | ||
| Preparation process for ESG disclosures | Consequential amendments to the NZX ESG Guidance Note (Guidance Note) as a result of the amendment to the commentary of recommendation 4.4 to reflect the importance of an issuer providing disclosures as to the process for identifying ESG information to enable stakeholders to assess the robustness of the information presented. | |
| Climate-related disclosures | Updating the Guidance Note with reference to the CRD regime and providing additional material such as identifying key aspects of the regime and where issuers can find more information to support affected issuers in becoming familiar with the new reporting requirements and transitioning to the new regime. Clarifying that NZX does not expect issues in addition to the CRD Regime to apply the TCFD framework and noting that the TCFD may be a useful framework for issuers who are not captured by the CRD regime to voluntarily report against. |
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| Flexibility in relation to reporting frameworks | Clarifying that the Guidance Note is not intended to create any additional obligations or expectation in relation to ESG reporting from those which exist under the Listing Rules, the Code and legislation. | |
| Additional frameworks | Referring to the ‘B Corp Certification’ rather than the UN Global Compact, as one of the major frameworks that issuers may wish to consider reporting against. Referring to the work being conducted by the International Sustainability Standards Board (ISSB) which is in the process of developing global sustainability-related disclosure standards. Referring to the GRESB Benchmark which may be of relevance to issuers in the property sector. Removing references to the IIRC, SASB and CDP as they have been absorbed into the ISSB. |
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| Green bonds | Removing the section relating to green bonds, given this section of the Guidance Note is now outdated and the FMA has published guidance in relation to its disclosure expectations in respect of green bonds. | |
| Greenwashing | Update to discourage greenwashing. | |
*There will be no amendments to the Code at this time in relation to modern slavery reporting as MBIE has commenced a consultation in relation to new legislation designed to address modern slavery and worker exploitation.
Principle 5 – Remuneration
| Topic | Recommendation/Commentary | Summary of proposed change |
| Non-financial goals when setting executive performance-based remuneration | Commentary to recommendation 5.2 | Expanding considerations when setting performance-based remuneration for executives to include considerations of non-financial goals that are integral to its strategy and values of the issuer. Encouraging issuers to disclose how its executive remuneration arrangements align with its strategy and performance objectives, and generic eligibility and vesting hurdles for any long-term incentive scheme that forms part of those arrangements. |
| Independant advice | Commentary to recommendation 5.2 | Where an issuer has relied on an independent remuneration report in formulating its director remuneration arrangements, the issuer should disclose a summary of the report, to support greater disclosure in this area (even if an issuer would not otherwise disclose reliance on an independent remuneration consultant). |
| Directors and executives | Recommendations 5.1 and 5.2 and the associated commentary | Drafting changes to recommendations 5.1 and 5.2, and the associated commentary to clarify the recommendation and commentary that apply to director and executive remuneration respectively. |
Principle 6 – Risk management framework
| Topic | Recommendation/Commentary | Summary of proposed change |
| Reporting | Commentary to recommendation 6.1 | Adding that an issuer should report its risk management framework to provide more clarity on how the issuer has identified the material risks to its business. |
Principle 7 – Internal audit
| Topic | Recommendation/Commentary | Summary of proposed change |
| Internal audit function | Commentary to recommendation 7.3 | Including a description of the role and purpose of the internal audit function as it is generally not well understood. |
Principle 8 - Shareholder meetings
| Topic | Recommendation/Commentary | Summary of proposed change |
| Hybrid vs physical meetings | Commentary to recommendation 8.2 | Encouraging issuers, particularly those in the S&P/NZX 50 Index, or those with geographically diverse registers to facilitate hybrid meetings. Clarifying when physical only meetings may be appropriate. |
| Virtual meeting guidance | Commentary to recommendation 8.2 | Providing additional guidance as to how issuers can assist investors in understanding and participating in the virtual aspects of meetings. |
This article was co-authored by Ronnie Duan, a Solicitor in our Corporate and Commerical team.
