Today, the Reserve Bank of New Zealand (RBNZ) and Financial Markets Authority (FMA) have published their report (Report) on their joint cross-sector thematic review on governance (Governance Review). The Report outlines good practices and key areas for improvement.
Who should read this? Why?
All directors and senior officers of RBNZ and FMA regulated entities should read the Report and consider how the findings and recommendations might be applied to their governance arrangements.
The Governance Review sampled entities across the banking, insurance, non-bank deposit taking and investment management sectors. However, the Report encourages boards of all regulated entities to assess their governance arrangements. In addition, many of the observations and recommendations may be equally relevant to other companies outside the regulated financial sector at which it is aimed. The Report is accordingly highly relevant to all New Zealand company directors – particularly the key principles that we detail below.
What does it cover?
Scope and methodology
The Report is based on a sample of 29 entities (across the banking, insurance, non-bank deposit taking and investment management sectors) selected to ensure a representative view over the relevant sectors, taking into account the size, ownership structures and incorporation location of each entity.
The Governance Review involved a desk-based review, interviews (including with board members), and an independent review of the Report by Dr John Laker (former Chairman of the Australian Prudential Regulation Authority).
Key principles and findings
The Report distilled a set of key principles to support proper governance, noting that this is not a ‘one size fits all’ approach.
We have set out the key principles identified in the Report alongside some of the key findings in each area.
Key principles identified
|Board roles and responsibilities are clearly defined, understood and remain fit for purpose.||
Governance frameworks: Entities had not undertaken a holistic review of their governance framework, or considered impacts on parts of the framework when policies were updated.
Delegation: Entities did not have documented processes for monitoring, managing and reporting on delegations and breaches of delegations.
Strategy: Strategy was well planned and documented with clear roles and responsibilities outlined in the board charter.
|Boards maintain the collective skills and experience to guide and oversee the implementation of the entity’s long-term strategy and to discharge their roles and responsibilities effectively.||
Selection, appointment and renewal processes: Most entities had strong processes to appoint new directors and CEOs, but several entities lacked a clear process for selecting the chair.
Suitability, training and development: Good practices included detailed descriptions of skills/capabilities necessary, and visibility of skills of individual directors.
|Succession planning is a priority for the chair.||
None of the locally incorporated entities had a clear, documented succession plan in place for the board chair. Almost none of these entities had succession plans for the board, or individual directors.
Many succession planning discussions were in board-only time and private sessions that were not minuted.
|Boards have sufficient independence to support good decision-making.||Some entities did not have any requirement to assess independence when tenure was extended.|
|Boards have sufficient diversity to support their role.||75% of entities did not have a diversity policy that applied to the board. Those that did, focused on diversity for selecting, appointing and renewing directors but without measurable targets.|
|Conflicts of interest are identified and managed effectively.||Although almost all entities had a standalone conflict of interest policy, many did not have clear, detailed procedures of managing conflicts under that policy.|
|Directors have sufficient capacity to fulfil their obligations.||Most entities had written expectations on time commitments but lacked clarity. While most entities assessed capacity of directors prior to appointment and/or on an ongoing basis, the absence of a formal framework meant these assessments lacked robustness and consistency.|
|Boards provide effective and appropriate challenge.||The RBNZ and FMA found this difficult to assess, but found the level and quality of challenge varied between different boards and individual directors.|
|A focus on continuous improvement and regular evaluation diverse board performance.||
Independent evaluation: 70% of entities had not undertaken an independent board performance evaluation at the time of the Review.
Exit procedures: Some entities had formal processes for exit interviews with CEOs, but many had either no interview or an informal process.
Minutes: Many of the minutes did not have enough information to enable referencing and reflection on past decisions.
In addition to the key principles above, the Report sets out a number of recommendations for regulated entities. The Report highlighted that “strong and sustainable governance policies, processes and practices are essential drivers of effective governance, along with good organisational culture”.
- ensure “a well-functioning corporate governance framework is in place that appropriately identifies and manages financial and non-financial risks in a timely manner.”
- embed good practices into their governance framework and proactively identify opportunities for improvement.
- be future-focused, taking appropriate measures to strengthen governance frameworks.
- have appropriate processes, practices, and capabilities to allow for asking the right questions, provide appropriate direction, challenge and oversight. This is crucial to good decision making and outcomes.
- ensure the organisation’s culture is aligned with its values and strategy in order for the entity to succeed. The tone set by the board and reinforced through behaviours is an integral part of effective governance.
The good news is that the Governance Review found that there was a number of good practices across sampled entities, with some room for improvement. The RBNZ and FMA did not find many gaps in terms of missing policies and frameworks, but rather the regulators recommended amending existing policies and frameworks with greater formality, comprehensiveness and/or detail.
Having said that, given the very large amount of work put in by the sampled entities preparing and submitting material for the desk-based review, and preparing for the interviews, some may have expected the Report to contain weightier findings and recommendations as to how governance can continue to be improved.
However, the stated aim of the review was to allow the RBNZ and FMA to develop their knowledge of board practices of those they regulate and to analyse these practices relative to their expectations, and we assume that has been achieved. Some sampled entities will have received direct feedback on matters that are specific to them.
Regulated entities need to take a holistic approach when reviewing their governance arrangements, to ensure any resulting improvements are tailored to suit the size and nature of the entity’s business model.
The RBNZ and FMA has encouraged all boards of regulated entities to assess their governance frameworks against the principles and findings in the Report and consider how to uplift their governance frameworks.
We expect that the RBNZ and FMA may follow this Report with updates to its guidance on governance in regulated entities – such as the insurance governance guidelines and the FMA Corporate Governance Handbook (the Report mentions that there may be a review of this Handbook in future, once the relevant RBNZ policy has been finalised).
The Governance Review findings will also be considered in the development of standards for the Deposit Takers Act and the review of the Insurance (Prudential Supervision) Act 2010.
If you have any questions about the Report, Governance Review or any related governance or regulatory matters, please contact one of our experts.
This article was co-authored by Hannah Cross, a Law Clerk and Sarah Jones, a Solicitor, in our Banking and Financial Services team.
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