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New Zealand Securities Commission |
Last Updated: 8 November 2014
CORPORATE GOVERNANCE IN NEW ZEALAND
PRINCIPLES AND GUIDELINES
A HANDBOOK FOR
DIRECTORS, EXECUTIVES, AND ADVISERS
SECURITIES COMMISSION, NEW ZEALAND
CORPORATE GOVERNANCE IN NEW ZEALAND PRINCIPLES AND GUIDELINES
A Handbook for Directors, Executives, and Advisers
Securities Commission
8th Floor, Unisys House
56 The Terrace
PO Box 1179
Phone 64 4 472 9830
Wellington
New Zealand www.sec-com.govt.nz
16 March 2004
Contents
Principles for Corporate Governance . . . . . . . . . . . . . . . . . . . .
. . 2
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 3
Who the Principles Apply to . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 4
How to Report Against the Principles
|
. . . . . . . . . . . . . . . . . . . . .
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5
|
All entities
|
|
5
|
Listed issuers
|
|
5
|
Principles and Guidelines . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . .
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7
|
1.
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ETHICAL STANDARDS
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7
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2.
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BOARD COMPOSITION AND PERFORMANCE
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9
|
3.
|
BOARD COMMITTEES
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13
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4.
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REPORTING AND DISCLOSURE
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15
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5.
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REMUNERATION
|
17
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6.
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RISK MANAGEMENT
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19
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7.
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AUDITORS
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20
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8.
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SHAREHOLDER RELATIONS
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22
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9.
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STAKEHOLDER INTERESTS
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24
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Principles for Corporate Governance
1. Directors should observe and foster high ethical standards.
Introduction
The Securities Commission published a report Corporate Governance in New
Zealand Principles and Guidelines in February 2004. The report sets out
nine Principles of corporate governance for application within a broad range of
entities.
The Principles are intended to contribute to high standards of corporate
governance in New Zealand entities. This will be achieved
when directors and
boards implement the Principles through their structures, processes, and
actions, and demonstrate this in their
public reporting and disclosure.
The report also sets out guidelines on the types of corporate governance
structures and processes that will help entities achieve
each Principle. It
explains the Commission’s view on each area covered and includes detailed
information on the extensive consultation
carried out prior to
publication.
The report is available from www.sec-com.govt.nz or in hard copy from the
Securities Commission on telephone 04 472 9830.
This Handbook is a shortened version of the report Corporate Governance in
New Zealand Principles and Guidelines. It is intended as a reference for
directors, executives and advisers, as they decide how best to apply the
Principles to their particular
entity. The nine Principles and their
accompanying guidelines are included together with the Commission’s view
on the particular
area of corporate governance.
Copies of this Handbook are also available from the Securities Commission’s website www.sec-com.govt.nz or by telephoning 04 472 9830.
Who the Principles Apply to
The Principles can be generally applied to the governance of entities that
have economic impact in New Zealand or are accountable,
in various ways, to the
public. This includes listed issuers, other issuers, state-owned enterprises,
community trusts, and public
sector entities.
Not all of the Principles will apply entirely to all entities. Public sector
organisations, for instance, do not have shareholders
in the traditional sense,
and are subject to specific board appointment processes. They nonetheless have
an owner and are accountable
to that owner, and to other stakeholders and the
public. These entities should observe the Principles to the fullest extent that
they reasonably can and depart only where they are subject to competing
statutory or public policy requirements.
The Commission’s primary focus is on issuers of securities. The
Principles do not impose any new legal obligations on issuers.
However, they set
out standards of corporate governance that the Commission expects boards of all
issuers to observe and to report
on to their investors and other
stakeholders.
Issuers who are publicly owned entities have particular corporate governance
responsibilities to their shareholders. The term “publicly
owned
entity” is used in this Handbook to describe public companies and other
entities, such as collective investment schemes,
which have investors with
similar ownership interests to company shareholders, and similar rights to vote
on matters affecting the
entity. The term “shareholders” includes
these investors.
We consider the Principles can be applied by investment trusts and
participatory schemes as well as by other corporate issuers. They
should also be
useful to trustees and statutory supervisors who supervise schemes and scheme
managers.
The Principles recognise that different types of entities can take different approaches to achieving good corporate governance. Good governance practices should reflect the nature of each entity, its ownership structure, and the range and interests of stakeholders.
Most of the Commission’s published reports on market behaviour reveal
shortcomings that can be attributed to corporate governance
failures. The
Commission will continue to focus strongly on corporate governance in its
enforcement work. We will comment or take
other action where we find examples of
poor governance. Any serious case may be referred to the Registrar of Companies
to consider
prosecution or prohibition from acting as a
director.
All entities
How to Report Against the Principles
The Commission’s recommended approach for corporate governance depends
heavily on disclosure of corporate governance practices
by entities.
Implementing the Principles necessarily includes reporting about corporate
governance practices to shareholders and
other stakeholders. For most entities
this can be achieved in the annual report.
Many responses to our consultation commented that a
“tick-in-the-box” approach to governance reporting would not achieve
anything. We agree. The Principles are formulated so that entities can report
how they have achieved each Principle.
This reporting is likely to include a brief description of the structures and
processes put in place by the board to help it fulfill
its governance
responsibilities, and how it has used them.
The guidelines are intended to help entities think about how they can achieve
each Principle. We do not expect entities to report
specifically against these
guidelines. Reporting should describe how an entity has achieved the
Principles.
Listed issuers
Listed issuers who have high standards of corporate governance are likely to be already addressing all the issues covered by the Principles, both by adopting certain practices and by reporting on them. They report on these under NZX Listing Rule 10.5.3(h), which requires annual reports to include “a statement of any corporate governance policies, practices and processes, adopted or followed by the Issuer”. For the many listed issuers whose
governance practices and reporting are already of a high standard, adopting the
Principles is unlikely to impose any new requirements or additional
reporting.
However, listed issuers whose reporting under Listing Rule 10.5.3(h) does not
cover all the corporate governance areas of the Principles
should, we think,
examine their corporate governance practices with a view to adopting and
reporting on all of the Principles.
The Principles therefore do not impose a dual reporting regime.
Listed issuers have continuous disclosure obligations under the Listing
Rules. Proper observance of corporate governance is an important
contributor to
transparency and efficiency in the capital markets. Some matters relevant to
corporate governance could be “material
information” that must be
disclosed under the Listing Rules of NZX. Nothing in this document about the
content of annual reports
should be taken to detract from any obligation a
listed issuer has to disclose a matter under the continuous disclosure Listing
Rules.
Formal corporate governance reporting may be new to some smaller unlisted entities. The Commission believes that all entities should think about their corporate governance practices; however, we are aware that it may take time for some smaller entities to achieve and report against all the Principles. In the meantime we think it would be helpful for these entities to report to their investors and stakeholders on progress made towards observing and reporting on each Principle.
Principles and Guidelines
1. ETHICAL STANDARDS
Principle
Directors should observe and foster high ethical standards.
Guidelines
1.1 The board of every entity should adopt a written code of ethics for
the entity that sets out explicit expectations for ethical
decision making and
personal behaviour in respect of:
• conflicts of interest, including any circumstances where a director may participate in board discussion and voting on matters in which he or she has a personal interest;
• proper use of an entity’s property and/or information; including safeguards against insider trading in the entity’s securities;
• fair dealing with customers, clients, employees, suppliers, competitors, and other stakeholders;
• giving and receiving gifts, facilitation payments, and bribes;
• compliance with laws and regulations; and
• reporting of unethical decision making and/or behaviour.
1.2 Every code of ethics should include measures for dealing
with breaches of the code.
1.3 Every entity should communicate its code of ethics to its employees
and provide employee training. Whistleblowing procedures
should be
provided.
1.4 Every board should have a system to implement and review the entity’s code of ethics. The board should monitor adherence to the code and hold directors, executives, and other personnel accountable for unethical behaviour.
1.5 Every entity should publish its code of ethics. Annual reports should
include information about the steps taken to implement
the code and monitor
compliance, including as appropriate any serious instances of unethical
behaviour and the action taken.
Securities Commission view
Ethical behaviour is central to all aspects of good corporate governance.
Unless directors and boards are committed to high ethical
standards and
behaviours, any governance structures they have put in place will not be
effective.
Good governance structures can encourage high standards of ethical
and responsible behaviour. A formal code of ethics will
assist in this when it
is understood by directors and management and applied to their governance
decision making.
Codes of ethics are increasingly being adopted by listed issuers. More
widespread adoption and implementation of codes of ethics
will help bring
New Zealand into line with international best governance practice and will
promote public confidence in governance
structures and behaviours
generally.
Different businesses face specific ethical issues. A code of ethics needs to
suit the particular circumstances and needs of the entity,
and to be formulated
with this in mind.
Codes of ethics can vary for different types of entity to address the
circumstances of each entity’s business. However, some
common ethical
issues arise in every entity that is accountable to shareholders,
investors, and other stakeholders. It
is our view that at a minimum a
code of ethics should address the matters set out in the guidelines above.
Depending on
the entity there may be other matters that it is appropriate to
include. As circumstances change, codes of ethics may need to be
expanded or
updated to ensure that they remain relevant.
The existence of a code of ethics will not, alone, create ethical and
responsible practices. A code is a guide and reminder of expected
behaviours
and sets standards against which behaviours can be judged. A code is
ineffective unless directors and employees actively
adhere to it. The board will
need systems in place to allow it to oversee implementation of the code. A code
is not fully implemented
unless there is monitoring to evaluate practices
against the code. This could form part of the board’s annual performance
assessment.
There is a trend overseas for entities to have an ethics committee to assess the performance of directors against the code of ethics. Some entities go as far as seeking independent verification, on a periodic basis, of the implementation of codes of ethics. Some entities may find this appropriate. Ultimately the board is responsible for ethical behaviour within the entity.
A code of ethics will not be effective unless there are consequences for
directors and employees who breach it. An effective code
of ethics will set out
processes for holding individuals accountable for unethical behaviour and
include appropriate sanctions. Accountability
for behaviour at variance to the
code will depend on who has committed the breach, e.g., executives to the board
and other personnel
to executives.
Transparency encourages ethical behaviour by increasing the accountability of
directors and other personnel. This accountability will
be enhanced if entities
publish their codes of ethics for investors and stakeholders, and describe in
their annual reports
the steps taken to implement the code and monitor
compliance. We are of the view that this reporting should include, in general
terms, information about any serious instances of unethical behaviour
encountered within the entity, and the steps taken to deal
with
this.
2. BOARD COMPOSITION AND PERFORMANCE
Principle
There should be a balance of independence, skills, knowledge, experience, and perspectives among directors so that the board works effectively.
Guidelines
2.1 Every issuer’s board should have an appropriate balance of
executive and non-executive directors, and should include
directors who meet
formal criteria for “independent directors”.
2.2 All directors should, except as permitted by law and disclosed to
shareholders, act in the best interests of the entity, ahead
of other
interests.
2.3 Every board should have a formal charter that sets out the
responsibilities and roles of the board and directors, including
any formal
delegations to management.
2.4 The chairperson should be formally responsible for fostering a constructive governance culture and applying appropriate governance principles among directors and with management.
2.5 The chairperson of a publicly owned entity should be independent.
No director of a publicly owned entity should simultaneously hold the roles
of board chairperson and chief executive (or equivalent).
Only in exceptional
circumstances should the chief executive go on to become the
chairperson.
2.6 Directors should be selected and appointed through rigorous, formal
processes designed to give the board a range of relevant
skills and
experience.
2.7 Directors should be selected and appointed only when the board is
satisfied that they will commit the time needed to be fully
effective in their
role.
2.8 The board should set out in writing its specific expectations of non-
executive directors (including those who are independent).
2.9 The board should allocate time and resources to encouraging directors
to acquire and retain a sound understanding of their
responsibilities, and this
should include appropriate induction training for new appointees.
2.10 The board should have rigorous, formal processes for evaluating its
performance, along with that of board committees and individual
directors. The
chairperson should be responsible to lead these processes.
2.11 Annual reports of all entities should include information about each
director, identify which directors are independent, and
include information on
the board’s appointment, training and evaluation
processes.
Securities Commission view
The board must guide the strategic direction of the entity, and direct and oversee management. Each director must have skills, knowledge and experience relevant to the affairs of the entity. Individual directors may bring particular attributes that complement those of other directors. An effective board requires a range and balance of relevant attributes among its members. Each director must be able and willing to commit the time and effort needed for the position.
Independence of mind is a basic requirement for directors. Each should
endeavour to have an independent perspective when making judgements
and
decisions on matters before the board. This means a director puts the interests
of the entity ahead of all other interests, including
any separate management
interests and those of individual shareholders (except as permitted by law).
Directors with an independent
perspective are more likely to constructively
challenge each other and executives—and thereby increase the board’s
effectiveness.
Non-executive directors, with no other interests to hinder their judgement in
the interests of the entity, can contribute a particularly
independent
perspective to board decisions. Increasingly, international practice has
been to establish criteria for defining
some independent directors of
listed entities, and to require or encourage a majority of such directors on
the board. Recent
studies indicate, however, that board effectiveness is not
always enhanced by directors’ formal independence if this is given
too
much weight in contrast to the independence of mind, and the skills, knowledge,
experience, and time that a director can contribute
to the entity. Independent
representation is an important contributor to board effectiveness, but only
when considered along with
the other attributes sought in a non- executive
director.
As reflected in the consultation, there may be practical constraints in New
Zealand if too high a level of formal independence is
required of boards. With
New Zealand’s relatively small pool of qualified and experienced directors
there is a risk that seeking
independence at the cost of all else will lead to
missed opportunities to appoint directors who can contribute to the success of
entities. We consider the underlying issues relating to director independence
can be addressed by:
• Directors having an independent perspective in their decision making;
• A non-executive director being formally classified as independent only where he or she does not represent a substantial shareholder and where the board is satisfied that he or she has no other direct or indirect interest or relationship that could reasonably influence their judgement and decision making as a director;
• The chairperson of a publicly owned entity being independent.
• In every issuer, the board including independent director representation.
• Boards of publicly owned entities comprising
– a majority of non-executive directors; and
– a minimum one third of independent directors.
• Boards taking care to meet all disclosure obligations
concerning directors and their interests, include information
about the
directors, and identify which directors are independent.
It is important to recognise the contribution of executives: the skills and perspectives they have provide a sound basis for challenge by non-executive directors. Strong executive representation at board meetings or on boards promotes a constructive exchange between directors and executives that is necessary for boards to be effective. To maintain proper balance between executive and non-executive directors, it can be useful for the latter to meet regularly to share views and information without executives present.
Efficiency and accountability are improved if the respective roles of the
board and executives are well understood by all. This can
be assisted by the
adoption of a board charter that sets out the responsibilities of the board
and its directors and that
includes details of any delegations given by the
board to management.
Directors are entitled to seek independent advice. This may be necessary to
fully inform themselves about an issue before the board,
and to effectively
contribute to board decisions.
The chairperson is critical in director-executive relations. The
chairperson’s role includes promoting co-operation, mediating
between
perspectives, and leading informed debate and decision making by the board. The
chairperson also has a pivotal role between
the CEO and the board. Balance in
the relationship between management and the board is particularly important in
entities with public
shareholders. This balance is facilitated if the roles of
chairperson and chief executive (or equivalent) are clearly separated
and if the
chairperson is an independent director. We agree with respondents to the
consultation that in general, the chief executive
should not move on to
become chairperson. Only in special circumstances should the roles be
combined, e.g. where an individual
has skills, knowledge and experience not
otherwise available to the entity (and where these circumstances are fully
explained to
investors).
The optimum number of directors for any entity will depend on its size and
the nature and complexity of its activities, as well as
its requirement for
independent directors. If a board is too large, decision making becomes
unwieldy; if too small, it may not achieve
the necessary balance of skills,
knowledge and experience needed by the entity. This balance is most important
for issuers.
The need to achieve the right mix, and to choose directors who can make an
appropriate contribution, make director selection and nomination
vitally
important. Rigorous selection, nomination and appointment processes are needed
to achieve this. A separate nomination committee
can help to focus resources on
this task, and also on succession planning.
Non-executive directors often do not have the advantage of prior knowledge of
an entity. This makes it important that they clearly
understand their expected
roles within the entity. It will be of value for a new director if the board
sets out its expectations
of his or her role.
To be individually effective, directors need to make themselves familiar
with both the activities of the entity and their
responsibilities as a
director. Induction training and opportunities to attend directors’
professional education can
greatly assist this process.
Effectiveness can also be enhanced if the board and directors regularly assess their own performance and that of their individual members against pre-determined measures of the efficiency and effectiveness of board processes, and on the contributions of individual directors. The Commission would like to see each board develop its own review and report processes as an integral element of its focus on good governance.
3. BOARD COMMITTEES
Principle
The board should use committees where this would enhance its effectiveness in
key areas while retaining board responsibility.
Guidelines
3.1 Every board committee should have a clear, formal charter that sets
out its role and delegated responsibilities while safeguarding
the ultimate
decision making authority of the board as a whole.
3.2 Where issuers have board committees, the charter and membership of
each should be published for investors.
3.3 Proceedings of committees should be reported back to the board to
allow other directors to question committee members.
3.4 Each publicly owned company should establish an audit committee of
the board with responsibilities to: recommend the appointment
of external
auditors; to oversee all aspects of the entity-audit firm relationship; and to
promote integrity in financial reporting.
The audit committee should
comprise:
• all non-executive directors, a majority of whom are independent;
• form of financial expertise; and
Securities Commission view
Board committees can significantly enhance the effectiveness of the board through closer scrutiny of issues and more efficient decision making in key areas of board responsibility. Committees enable the board to make maximum use of particular skills, knowledge and experience of directors. In addition, they can be a means of fairly apportioning board workload among directors. 13
A committee must have an effective relationship with the board as a whole.
Committee members must clearly understand the committee’s
purpose and role
and the extent of any formal delegations from the board. A clear, formal
committee charter agreed by the board is
an efficient way to achieve this.
Disclosing the charter and information on the composition and work of committees
will assist investors
and stakeholders to assess the effectiveness of board
committees.
The accountability of the board as a whole must be maintained, including in
relation to work undertaken by committees. The board must
be well informed about
decisions for which it retains ultimate responsibility. For this reason it
is important that the
proceedings of committees are reported back to the
board, and time is given for any director who is not on the board to comment on
or seek an explanation of the business of the committee.
Financial reporting and audit processes are a key area of board
responsibility. It is increasingly common practice in New Zealand
and
internationally for entities to use audit committees. We believe they are an
important tool for all publicly owned entities,
and we would encourage their use
by all issuers.
As with other committees, the role of the audit committee needs to be clearly
established. This can be achieved by a formal charter,
including responsibility
for recommending the appointment of external and internal auditors; overseeing
the entity-auditor relationship;
and promoting the integrity of the
entity’s financial reporting.
The structure of the audit committee is important, both in terms of
independence and the skills needed. To ensure effectiveness, it
should
comprise:
• only non-executive directors;
• a majority of independent directors;
• a chairperson who is an independent
and is not the chairperson of the board.
Other areas of board performance could also be improved by the use of committees. Remuneration and nomination committees are increasingly being used in New Zealand and overseas. It is vital that boards give proper time and attention to both matters. All entities, particularly those with large boards, should carefully consider whether the use of committees could enhance their effectiveness in these key areas.
4. REPORTING AND DISCLOSURE
Principle
The board should demand integrity both in financial reporting and in the
timeliness and balance of disclosures on entity affairs.
Guidelines
4.1 All boards should have a rigorous process for assuring directors of
the quality and integrity of entity financial reports
including their relevance,
reliability, comparability, and timeliness.
4.2 Annual reports of all entities should, in addition to all information
required by law, include sufficient meaningful information
to enable investors
and stakeholders to be well informed on the affairs of the entity.
4.3 All issuers should have an effective system of internal control for
reliable financial reporting.
4.4 The chief executive, the chief financial officer (or
equivalent officers), and at least one other director of publicly
owned entities
should certify in the published financial reports that these comply with
generally accepted accounting standards and
present a true and fair view of the
financial affairs of the entity.
4.5 Each listed entity should have a clear and robust internal process
for compliance with the continuous disclosure regime, which
should include board
examination of continuous disclosure issues at each board meeting.
4.6 Every entity should make its code of ethics, board committee charters
and other standing documents important to corporate
governance readily available
to interested investors and stakeholders.
4.7 Boards of issuers should report annually to investors on how the entity is implementing the Principles and explain any significant departure from guidelines supporting each Principle.
Securities Commission view
High standards of reporting and disclosure are essential for proper
accountability between an entity and its investors and stakeholders.
Accountability is a principal incentive for good corporate governance. Reporting
and disclosure encompasses both financial reporting
and reporting on other
affairs of the entity, including corporate governance structures, processes, and
actions.
The quality and integrity of financial reports are reflected in their
relevance, reliability, and comparability, and in how understandable
they are
for users. Other disclosures must be balanced and timely. Legal and regulatory
requirements, including the NZX Conduct
Rules, establish baseline expectations
for reporting and disclosure. Good corporate governance includes compliance
with these
requirements and a commitment to ensuring that investors,
stakeholders, or the recipients of public sector reports are sufficiently
informed to allow them to assess the entity and the board.
The board is directly responsible for the integrity of financial reports.
This requires internal controls and processes to enable
directors to satisfy
themselves of the quality of financial reporting. The audit committee (see 3.)
and independent auditors (see
7.) make a major contribution. These processes
should include certification by the chief executive and the chief financial
officer
(or equivalent officers). These executives are principally accountable
to directors on whom there is already well-established responsibility
for
financial reports. We see this accountability further strengthened, especially
in publicly owned entities, by the CEO and CFO
publicly demonstrating their
responsibility by certifying the financial statements. While directors retain
liability for the financial
statements of an entity, they will to a degree rely
on management assurances about the accuracy and completeness of financial
reports.
In view of this, an added public certification by the responsible
executives will enhance investor confidence in the entity.
Reporting and disclosure requirements are of most significance for public
sector entities and for issuers and listed entities, consistent
with current
law. However, other entities could adopt similar standards in the form and
timeframe that best suits their legal form,
types of business, stage of
development, and also the range of users of their financial reports. We
encourage all issuers to see
listed entity reporting and disclosure as best
practice in the New Zealand environment, to the extent applicable. All entities
that
have raised money from the public should report to investors on the
entity’s goals, strategies, position, and performance.
The continuous disclosure regime is a major contributor to higher standards of information disclosure in the listed issuer sector. The immediacy of continuous disclosure requires that boards of listed issuers have processes to raise awareness throughout the entity of the obligations of disclosure, and efficient channels to alert management of matters that may require disclosure. Compliance with continuous disclosure is a board responsibility, and the processes should ensure that continuous disclosure compliance is placed on the agenda of board meetings.
The principles-based approach to corporate governance relies on meaningful
disclosure. Reporting should not be by “tick-in-the-box”.
It should
involve boards saying how they have implemented each Principle, i.e., the
actions they have taken that suit the legal form,
business type and stage of
development of the entity. Describing governance structures and behaviours in
this way will enable investors
and stakeholders to make an informed assessment
of the governance of the entity. The disclosure process can also be used as a
facilitation
process to assist the board in its assessment of the entity’s
processes and internal control.
5 REMUNERATION
Principle
The remuneration of directors and executives should be transparent, fair, and
reasonable.
Guidelines
5.1 The board should have a clear policy for setting remuneration of
executives (including executive directors) and non-executive
directors at levels
that are fair and reasonable in a competitive market for the skills, knowledge
and experience required by the
entity.
5.2 Publicly owned entities should disclose their remuneration policy in
annual reports.
5.3 Executive (including executive director) remuneration should be
clearly differentiated from non-executive director remuneration.
5.4 Executive (including executive director) remuneration packages
should include an element that is dependent on entity
and individual
performance.
5.5 No non-executive director should receive a retirement payment unless eligibility for such payment has been agreed by shareholders and publicly disclosed during his or her term of board service.
Securities Commission view
Adequate remuneration is necessary to attract, retain and motivate high
quality directors and executives. Such remuneration, it is
generally expected,
will be reflected in enhanced entity performance. To some extent, remuneration
can also be a means of sharing
with directors and executives the financial
rewards and risks of good or poor performance.
The issues in establishing remuneration are particularly complex and can only
be viewed in the context of each entity. It is important
that every board has
policies and processes for setting remuneration and for remuneration reporting
(including disclosures required
under the Companies Act 1993).
Shareholders of a publicly owned company have a particular interest in
seeing that the remuneration policy will attract the right
directors, and that
the level of remuneration is reasonable. To enable shareholders to assess this,
the policy for determining remuneration
must be disclosed, as well as the total
remuneration and other benefits paid to directors.
Executive and non-executive directors have different roles and different
incentives. Drawing a clear distinction between the remuneration
packages of
executive directors and non- executive directors allows entities the
flexibility to properly address the circumstances
of both.
If a part of executive directors’ remuneration is related to entity
performance over time, their efforts are more likely to
be focused on making a
contribution to future investor returns rather than only on short term gains.
Such remuneration may include
shares or options.
Non-executive directors’ remuneration is usually by way of fees. Again
it is important for accountability of publicly owned
entities that all
benefits received are disclosed to shareholders. It is consistent with this
transparency that non-executive
directors should not receive retirement payments
except where eligibility for such payments has been agreed and disclosed during
the term of service on the board, and in the case of publicly owned entities,
where shareholders have been asked to approve these
payments.
Some entities, particularly those with larger boards, may benefit from appointing a remuneration committee to make recommendations on remuneration for executive directors and other executives. Where shares or options are part of performance-related remuneration, the committee can recommend to the board (or have delegated responsibility for) an appropriate approach to valuation and disclosure.
6 RISK MANAGEMENT
Principle
The board should regularly verify that the entity has appropriate processes
that identify and manage potential and relevant risks.
Guidelines
6.1 The board should require the entity to operate rigorous processes for
risk management and internal control.
6.2 The board should receive regular reports on the operation of risk
management and internal control processes.
6.3 Boards of issuers should report annually to investors and stakeholders on
risk identification and management and on relevant internal
controls.
Securities Commission view
Risk is an essential feature of business. Each entity is faced with a range
of risks that it needs to identify and manage (or
avoid). Accordingly, risk
management is a critical area of responsibility for the board. Boards can only
be effective if they
know of, and can properly assess, the nature and magnitude
of risks faced by the entity. Effective risk management can enable an
entity to
take the risks appropriate to its business.
Processes to identify, monitor and manage risks are needed so that the board
and managers can be properly informed and can implement
systems of internal
control that are responsive to the identified risks. These processes will
usually operate alongside the internal
control structures of the entity. The
size and circumstances of the entity and the particular risks it faces will help
determine
the best risk management processes for the entity. Effective
processes will accommodate the types of risks that the entity is
likely to face,
including legal compliance, financial, operational, technological, and
environmental risks. An internal audit function
can assist effective risk
management and internal control in entities that face significant
financial, operating, and compliance
risks.
For issuers, disclosure of the nature and magnitude of material risks and how the board intends to manage these will be of significant benefit to investors, who need this information in order to make informed investment decisions. For other entities, disclosure of risk management policies may be useful where these affect specific stakeholders.
7. AUDITORS
Principle
The board should ensure the quality and independence of the external audit
process.
Guidelines
7.1 The board should inform itself fully on the responsibilities of
external auditors and be rigorous in its selection of auditors
on professional
merit.
7.2 The board should satisfy itself that there is no relationship between
the auditor and the entity or any related person that
could compromise the
independence of the auditor, and should require confirmation of this from the
auditor.
7.3 The board should facilitate full and frank dialogue among its audit
committee, the external auditors, and management.
7.4 No issuer’s audit should be led by the same audit partner for
more than five consecutive years (i.e. lead and engagement
audit partners should
be rotated from the engagement after a maximum of five years).
7.5 Boards of issuers should report annually to shareholders and
stakeholders on the amount of fees paid to the auditors, and should
differentiate between fees for audit and fees for individually identified
non-audit work (i.e., separating each category of non-audit
work undertaken by
the auditors, and disclosing the fees payable for this).
7.6 Boards of issuers should explain in the annual report what non-audit work was undertaken and why this did not compromise auditor independence.
Securities Commission view
External auditing is critical for integrity in financial reporting. To
properly perform their role, auditors must observe the
professional
requirements of independence, integrity, and objectivity. They need to have
access to all relevant information and
individuals within an entity that play a
role in its financial reporting processes.
The board and the auditors are jointly responsible for ensuring that an
entity’s audit is conducted in the context described
above. Good
governance requires structures that promote auditors’ independence from
the board and executives, protect
auditors’ professional objectivity
in the face of other potential pressures, and facilitate access to information
and personnel.
The board audit committee has a crucial role in selecting and recommending
board and shareholder appointment of auditors, and in
overseeing all aspects of
their work.
Rotation of auditors is important to promote independence and objectivity
over time. However, the advantages of this need to be balanced
against the costs
that are necessarily incurred when a new auditor is engaged. International
practice strongly favours rotation of
audit partners rather than audit firms.
Although independence would be maximised by rotating audit firms, there are
practical impediments
and efficiency losses incurred by doing this.
When an audit firm commences a new audit engagement, costs associated with
the audit are necessarily higher until the auditor
becomes familiar with
the entity and its business. Retaining a degree of continuity of auditors
will increase the entity-specific
knowledge that can be bought to bear in the
audit process. Five yearly partner rotation provides a balance between cost and
efficiency
losses and independence gains, and is in line with international best
practice.
Limiting non-audit work that an accounting firm can do for the client
entity will help maintain independence and objectivity.
There is a diversity of
views in New Zealand and internationally on the types of non-audit work that
should be restricted, and how
this should be done. One core measure is that an
accounting firm should not undertake any work for an audit client that
compromises,
or is seen to compromise, the independence and objectivity of the
audit process. Given this measure, and within the framework of
relevant
legislation and professional standards, boards need to consider this question in
the context of their entity. The quantum
of fees paid for non-audit work will be
a factor in determining independence.
Auditor independence is crucially significant to investors, who rely heavily on this external assurance of an issuer’s financial reporting. Boards must be accountable to investors where they allow auditors to undertake non-audit work. This accountability can be achieved by boards of issuers including in the annual report a statement as to why, in their opinion, any non-audit work performed does not impinge on the independence of the auditor. This must
be accompanies by disclosure of all fees paid to the auditor, with various
types of non-audit work separately identified. This disclosure
would be
assisted by professional standards relating to disclosure of audit fees and
other fees paid to audit firms.
The board audit committee has a crucial role where complaints arise in the
auditor-client relationship, or in any other aspect of
auditing. The committee
should have a defined process for dealing with complaints from auditors, for
example over access to relevant
information held by management. The committee
should also be open to the views of employees or others who believe auditor
independence
and objectivity is or might be compromised. This includes
whistleblowing actions by individuals who act in good faith with respect
to
external and internal audit processes.
The Companies Act contains accountability mechanisms that allow auditors to
report directly to shareholders where reappointment is
not sought, or where the
entity seeks to remove an auditor. The board is required to permit auditors to
attend annual meetings and
be heard. Accountability can be enhanced when boards
ask auditors to attend shareholders’ meetings and to allow shareholders
an
opportunity to ask appropriate questions of the auditors.
8. SHAREHOLDER RELATIONS
Principle
The board should foster constructive relationships with shareholders that encourage them to engage with the entity.
Guidelines
8.1 Publicly owned entities should have clear published policies for
shareholder relations and regularly review practices, aiming
to clearly
communicate the goals, strategies and performance of the entity.
8.2 Publicly owned entities should maintain an up-to-date website, providing:
• a comprehensive description of its business and structure;
• a commentary on goals, strategies and performance; and
• key corporate governance documents;
8.3 Publicly owned entities should encourage
shareholders to take part in annual and special meetings by holding these in
locations
and at times that are convenient to shareholders.
8.4 The board should facilitate questioning of external auditors by
shareholders during the annual meeting.
Securities Commission view
Shareholders are the ultimate owners of entities. In general, company
shareholders have a right to vote on certain issues affecting
the control and
direction of their company. In this document we have used the term shareholders
broadly to include people with an
ownership interest in non-company entities
where they have a similar right to vote on entity issues. The rationale for good
shareholder
relations applies equally whatever the legal form of the
entity.
As owners of their entities, shareholders have important rights and functions
in corporate governance. Certain matters are reserved
for shareholder approval.
Boards can take steps to facilitate appropriate shareholder involvement in such
meetings and decisions.
Entities will be better placed to attract the
capital and support they need, and to demonstrate real accountability, if
relations between entities and their shareholders are cooperative and
mutually responsive.
Good governance requires structures and behaviour that promote good
relations through effective communications between entities
and their
shareholders. Publicly owned entities in particular can enhance this
relationship by having a policy for communicating
with shareholders and
for encouraging appropriate shareholder participation. Steps that can be taken
include:
• allocating time and resources to providing clear, plain language explanations of performance, strategies and goals, and identified material risks in the annual and (for listed entities) half yearly reports;
• maintaining websites that have comprehensive up-to-date information on their operations and structures, and an archive of corporate governance documents, shareholder reports, and past announcements and performance data;
• increasing the use of electronic technologies to make information more accessible to shareholders and others, including (where requested) email for distribution of shareholder documents and for responding to questions;
• holding shareholder meetings in locations and at times that are convenient to shareholders, and if appropriate in view of the number and location of shareholders, encouraging participation by teleconference or web cast.
• clearly setting out resolutions for shareholder decision, and encouraging informed use of proxies; and
• providing ready access to auditors for shareholder questions at annual and special meetings.
Institutional shareholders have a vital role to play in corporate governance,
by monitoring company performance. If a disclosure-based
approach to maintaining
corporate governance standards is to be effective, those with voting power in an
entity need to make use
of their rights to question and challenge the
board’s performance and its corporate governance practices. Boards can
increase
accountability by encouraging institutional shareholders to vote on
resolutions. Such shareholders, and in particular fund managers
who are
themselves accountable to public investors, should disclose their voting
policies and record to their clients and investors.
9. STAKEHOLDER INTERESTS
Principle
The board should respect the interests of stakeholders within the context of
the entity’s ownership type and its fundamental
purpose.
Guidelines
The board should have clear policies for the entity’s relationships
with significant stakeholders, bearing in mind distinctions
between public,
private and Crown ownership.
The board should regularly assess compliance with these policies to ensure
that conduct towards stakeholders complies with the code
of ethics and the law
and is within broadly accepted social, environmental, and ethical norms,
generally subject to the interests
of shareholders.
Public sector entities should report annually to inform the public of their
activities and performance, including on how they have
served the interests of
their stakeholders.
Securities Commission view
Each entity has stakeholders who contribute to their performance in different ways. Examples include employees, customers, creditors, suppliers, the community and others. Legal obligations and relevant social, ethical, and environmental factors need to be taken into account when considering the interests of stakeholders.
Stakeholder interests have a particular significance for public sector
entities with a public good purpose. These entities operate
on public funding,
and need to pay careful attention to their public stakeholders. While the
principal reporting of most public sector
entities is to the Crown, public
accountability will be enhanced if they also report each year on how they have
served the interests
of their public stakeholders.
Company law requires directors to act in the best interests of the company
(subject to certain exceptions). However, advancing the
interests of other
stakeholders, such as employees and customers, will often further the interests
of an entity and its shareholders.
There is a trend for listed companies to
report on how they have affected their stakeholders.
Good corporate governance practices will generally benefit stakeholders.
Relationships with significant stakeholders can be improved
if they are
addressed in specific policies which are disclosed and reported on to
stakeholders. In general, we agree with the response
to our consultation that
managing stakeholder interests should be viewed as simply good business.
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