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New Zealand Securities Commission |
Last Updated: 16 November 2014
REVIEW OF CORPORATR GOVERNANCE DISCLOSURE BY SELECTED
ISSUERS
SECURITIES COMMISSION NEW
ZEALAND
Securities Commission New Zealand
Level 8, Unisys House
56 The Terrace
P O Box 1179
WELLINGTON 6011
Email seccom@seccom.govt.nz
Website www.seccom.govt.nz
July 2010
ISBN 978-0-478-36502-3 (print version) ISBN 978-0-478-36503-3
(PDF)
CONTENTS
TERMS
...............................................................................................................................
1
EXECUTIVE SUMMARY
................................................................................................
2
INTRODUCTION
..............................................................................................................
5
BACKGROUND
................................................................................................................
5
Sample selection
.............................................................................................................
6
OVERALL FINDINGS
......................................................................................................
7
Good disclosers
...............................................................................................................
8
Poor disclosers
................................................................................................................
8
FINDINGS BY PRINCIPLE
............................................................................................
10
Principle 1: Ethical
standards........................................................................................
10
Principle 2: Board composition and performance
........................................................ 11
Principle 3: Board committees
......................................................................................
12
Principle 4: Reporting and disclosure
...........................................................................
13
Principle 5: Remuneration
............................................................................................
14
Principle 6: Risk management
......................................................................................
15
Principle 7: Auditors
.....................................................................................................
16
Principle 8: Shareholder relations
.................................................................................
16
Principle 9: Stakeholder
interests..................................................................................
17
CONCLUSION.................................................................................................................
19
APPENDIX 1: THE SECURITIES COMMISSION PRINCIPLES FOR CORPORATE GOVERNANCE ............................................................................................................... 20
APPENDIX 2: LIST OF ISSUERS REVIEWED ............................................................ 21
1
TERMS
Board the governing body of an entity,
whatever called, including councils and local authorities.
Entity any entity operating under a
governing board that is accountable to investors and/or
stakeholders. It
includes companies registered under the Companies Act 1993, all issuers of
securities, unit trusts and other
collective investment schemes, and state-owned
enterprises, as well as many statutory bodies in the public sector.
Executive employees of an entity who report to the board of the entity or to the
Chief Executive Officer (CEO).
Executive director a director who is an employee of the entity.
Independent director a director who is not an employee of
the entity and who does not represent a substantial
shareholder and
who has no other direct or indirect interest or relationship that could
reasonably influence their
judgement and decision making as a
director.
Issuer any entity that has issued
securities to the public. Issuers include some statutory
bodies in the public
sector that issue securities.
Listed issuer an entity with securities quoted on New Zealand Exchange
Limited.
Non-executive director a director who is not an employee of the
entity.
Publicly owned entity any entity that has shareholders (as
defined below) that are members of the public. This includes
companies and
collective investment schemes that are widely held.
Shareholder a person who owns shares in a listed or unlisted company, or
a person who owns an interest in a collective investment scheme where they
have rights, similar to those of a shareholder in a company,
to participate in
the assets of the entity on winding up and to vote on some issues regarding the
entity.
Stakeholder in relation to an entity, any person
or group other than shareholders that is affected by
the affairs of the
entity.
EXECUTIVE SUMMARY
Assessing the strength of corporate governance in an entity is an important
element of investment decision making. Investors rely
on robust corporate
governance to ensure that an entity is managed competently with their interests
to the fore, and that the disclosures
upon which they judge the current and
potential performance of their investments are accurate and timely.
For entities that require investment, good governance is good business. Good
governance not only provides entities access to a wider
range of capital, but
investors are also willing to pay a premium for shares in a well-governed
company.1
To reap these benefits, entities not only need to be well governed, but be
seen to be well governed. These benefits also come to the fore in
recessionary times where investors are seeking out entities that signal
good
governance. Disclosure of corporate governance policies and procedures is one
way entities can demonstrate the strength of
its governance to investors and
other stakeholders.
This report presents the findings of the Securities
Commission’s latest review of corporate governance reporting.
The
purpose of this report is to inform governing bodies of our findings so that
they can reflect critically on their governance
practices and disclosures. In so
doing, we aim to promote high standards of corporate governance by issuers and
ultimately improve
confidence in New Zealand’s capital markets.
This review is of corporate governance disclosures by selected issuers, not
of their actual behaviour. Corporate governance disclosures
are an important
indicator of the emphasis placed on corporate governance by a board, but
investors and other stakeholders should
not take this as a guarantee of good
governance in practice.
The review analysed annual report and website disclosures of 68 selected
issuers2 against the Commission’s nine Principles, which
cover the core elements of good corporate
governance.3
1 McKinsey & Company (2000). Investor Opinion Survey on Corporate Governance. McKinsey & Company. http://www.mckinseyquarterly.com/Three_surveys_on_corporate_governance_965# (accessed May 3, 2010).
2 A list of issuers reviewed is included in Appendix 2.
3 The Principles are set out in Appendix 1. In addition a Corporate Governance Handbook for Directors,
Executives and Advisers, published by the Commission in 2004 is available on
the Commission’s website www.seccom.govt.nz. The Commission
recognizes that regulatory thinking about corporate governance has developed
since the 2004 Principles and Guidelines;
and that the Principles will need to
be considered for review by the Financial Markets Authority once it is
established. In the
meanwhile, reference is made elsewhere in this Report to
some of the source material reflecting these developments in order to
assist
issuers in advancing their own thinking.
Overall findings
Many issuers provide transparent and relevant disclosures on their corporate
governance policies, procedures and practices. Many
issuers disclose clear and
comprehensive information on:
|
Principle 2:
|
The independence, expertise and experience of board members;
|
|
Principle 3:
|
The use of board committees, such as remuneration and audit
|
|
committees;
|
|
Principle 5: Directors’ and executives’ remuneration, including use of
remuneration policies and committees;
Principle 6: Risk management policies and practices; and
Principle 7: Processes for ensuring the quality and independence of
external auditors, such as audit committees and auditor
independence
policies.
Issuers should improve disclosures on:
Principle 1: Observing and fostering high ethical standards, e.g. through compliance with a code of ethics;
Principle 4: Ensuring any standing corporate governance documents are readily available to interested investors and stakeholders, e.g. via the entity’s website;
Principle 5: Disclosure of how remuneration incentives are aligned with the issuer’s objectives and risk management policies;
Principle 6: Applying risk management policies to an issuer’s material business
and environmental risks e.g. by disclosing a risk matrix;
Principle 8: Building constructive relationships with shareholders e.g. by disclosing market disclosure and communications policies; and
Principle 9: Considering and respecting stakeholders’
interests, e.g. by disclosing stakeholder relations
policies and other
social and environmental matters.
The Commission notes that adopting its Principles as a format for reporting
can enhance the clarity of disclosures, as illustrated
by The Warehouse Group
Limited's 2008 annual report.
The Commission has written to issuers where it considers that their
disclosures can be improved. We appreciate issuers’ efforts
to promote
good governance in New Zealand, as demonstrated by their co-operative and
positive responses relating to our correspondence.
Findings by entity type
In general, publicly owned entities publish significantly more governance
information than closely held entities. In particular, some
subsidiaries of
overseas listed entities and finance companies provide little or no
corporate governance disclosures.
The Commission expects these issuers to
improve their disclosures.
Promoting good governance in New Zealand
There is still scope for New Zealand issuers to improve their
corporate governance policies, practices and disclosures.
In particular, we
recommend that entities reconsider their disclosures in relation to ethical
standards, remuneration, risk management,
shareholder relations and stakeholder
interests.
Corporate governance best practice continues to evolve
internationally. The global financial crisis highlighted deficiencies
in
remuneration and risk management policies, particularly in financial
institutions.4 Similarly, many New Zealand finance companies
lacked the appropriate risk and remuneration policies, procedures and practices
required
for the high-risk nature of the industry.
Entities must not only stay informed of recent developments in corporate
governance best practice, but appropriately implement such
developments in their
organisations. For example entities should consider whether it is
appropriate to separate their
risk management and audit committee
functions.5
The Commission will continue to review the corporate governance disclosures
of issuers as part of its Corporate Governance Review
Programme.
4 Walker, David, 2009, November 26. A review of corporate governance in UK banks and other financial industry entities – Final recommendations. Available URL: http://www.hm- treasury.gov.uk/walker_review_information.htm.
5 For further discussion on this matter refer to the discussion on Principle 3 in the Findings by Principle
section of this report.
INTRODUCTION
1. Recently, the Securities Commission recommenced its reviews
of issuers’ corporate governance disclosures.
Selected issuers’
disclosures are reviewed against the Securities Commission’s Corporate
Governance Principles (the Principles)
and Guidelines (the
Guidelines).6
2. The purpose of this report is to inform governing bodies,
investors and other stakeholders of our findings so that they
can reflect
critically on the governance practices and disclosures of issuers. In so
doing, we aim to promote high standards
of corporate governance by issuers
and ultimately improve confidence in New Zealand’s capital
markets.
3. We emphasise that this review is of corporate governance
disclosures by selected issuers, not of their actual
behaviour. Comprehensive
corporate governance disclosures are an important indicator of the emphasis
placed on corporate governance
by a board, but investors and other stakeholders
should not take this as a guarantee that that emphasis is reflected in
practice.
4. This report begins by outlining the background and format of our
reviews and summarises the overall findings. The
findings per Principle
and recommendations for issuers are discussed later in this
report.
BACKGROUND
5. In response to a number of high profile corporate collapses the
Commission published its Principles and Guidelines in 2004.
The Principles are
high level objectives which all entities should aim to achieve in each area of
corporate governance. A full list
of the Principles is included in Appendix
1.7
6. The Principles recognise that entities take different
approaches to achieving good governance according
to their nature,
ownership structure and stakeholders’ interests. As such, the
Guidelines do not represent rules
for governance. Instead, their purpose is to
assist entities in evaluating the effectiveness of their corporate governance
procedures
in relation to each Principle.
7. The Commission recommends that issuers report annually to
investors on how the entity is implementing the Principles and
explain any
significant departure
6 The reviews are performed pursuant to section 10(c) of the Securities Act “to keep under review practices relating to securities, and to comment thereon to any appropriate body.”
7 Further background to the Principles and Guidelines are
available online at www.seccom.govt.nz
and copies of the Commission’s publication Corporate Governance in New
Zealand Principles and Guidelines: A Handbook for Directors, Executives and
Advisers can be requested free of charge.
from the Guidelines supporting each Principle.8 The
Commission’s Corporate Governance Review Programme (CGRP) reviews
issuers’ corporate governance disclosures in their
annual reports and on
their websites, against the Principles and Guidelines.
8. Our reviews focus on the disclosures each issuer has made on how
they have achieved each of the Principles.
9. We have written to issuers where we consider that their
disclosures are unclear or could otherwise be improved, making
recommendations
on further disclosure where appropriate.9
10. The Commission previously reviewed the corporate governance disclosures of listed issuers in their 2004 and 2005 annual reports. The Commission’s comments on the 2005 review are available on the Commission’s website.10 The current review also assessed issuers’ website disclosures as they are increasingly
used for corporate governance reporting. As a result, the current review is
not strictly comparable to prior reviews. However,
given that
significant use of website disclosure is a more recent practice, we consider
that comparisons do provide some insight
into developments in corporate
governance disclosures.
Sample selection
11. The Commission reviewed the disclosures of 68 issuers with
balance dates ranging from 30 June 2008 to 30 June
2009. Of these:
(a) 57 had securities listed on a registered exchange11 and two had securities quoted on the trading exchange Unlisted.
(b) 53 were publicly owned entities and 15 entities were closely held.
(c) The 15 closely held entities included a registered bank and 10 finance
companies, six of which were operating under moratorium
agreements.
12. A full list of the issuers reviewed is included in Appendix
2.
8 Guideline 4.7.
9 While the Principles are not legally enforceable, the Commission strongly recommends that issuers consider and take action on our recommendations. The Commission does not require issuers to reply to our
letters on any matters we raise.
10 Chen, M and Cotton, A. Securities Commission Principles of Corporate Governance – Update (2006). The New Zealand Securities Commission. http://www.seccom.govt.nz/speeches/2006/governance-
principles-update.
11 Either NZX, NZAX, or NZDX.
OVERALL FINDINGS
13. Most issuers disclosed some information relating to each Principle.
The most common disclosures, of which 74-88% of issuers
reviewed reported on,
are:
Principle 2: The independence, expertise and experience of board members;
Principle 3: The use of board committees, such as remuneration and audit committees;
Principle 5: Directors’ and executives’ remuneration, including use of remuneration policies and committees;
Principle 6: Risk management policies and practices; and
Principle 7: Processes for ensuring the quality and independence of
external auditors, such as audit committees and auditor independence
policies.
14. We consider that these findings are an improvement on the 2005
reviews. In the latest reviews, the quality of corporate
governance disclosures
varies and we therefore discuss good practice examples in the Findings by
Principle section of this report.
15. Consistent with our 2005 reviews, the Principles least reported on
are:
(a) Principle 1: Observing and fostering high ethical standards, such as compliance with a code of ethics;
(b) Principle 8: Building constructive relationships with shareholders, e.g.
establishing market disclosure, communications and continuous disclosure policies; and
(c) Principle 9: Considering and respecting stakeholders’ interests, including
stakeholder relations policies and other social and
environmental disclosures.
16. Approximately 70% of issuers report information on Principle
1, 50% on Principle 8 and 40% on Principle 9. The
Findings by Principle
section further discusses these findings and makes recommendations on how
issuers could better meet
the Principles.
17. Publishing standing governance documents online is a simple means
for issuers to improve their corporate governance reporting.
Despite the
majority of issuers referring to having a code of ethics, committee charters and
remuneration or risk management policies,
less than half of issuers make these
documents publicly available.
18. Some issuers publish their standing documents as part of a
corporate governance manual. For example, Property for Industry
Limited’s
Corporate Governance Manual incorporates how it meets the Principles and
the NZX Corporate
Governance Best Practice Code. This manual is published on Property for
Industry Limited’s website. Good disclosers
19. Many issuers provide good corporate governance disclosures, notably The
Warehouse Group Limited, Auckland International Airport Limited and Fisher
& Paykel Healthcare Limited. The quality of these disclosures is high,
clearly addressing all of the Principles and reflecting
their nature, size and
operations. The Commission recommends all entities tailor their corporate
governance disclosures to fairly
reflect their corporate governance policies,
procedures and practices.
20. Some issuers adopt the Securities Commission’s Principles or
other corporate governance principles and guidelines,
such as those established
by NZX Limited (NZX) or ASX Limited (ASX). For example, The Warehouse Group
Limited has adopted the Commission’s
Principles as a format for reporting.
This adds clarity to the disclosures in its annual report. Other entities may
wish to follow
this example.
Poor disclosers
21. Publicly owned entities generally provide more comprehensive
disclosures than closely held entities. Several closely held
entities provide
little or no additional disclosures to the minimum statutory
requirements.12 The closely held finance companies’
disclosures were poor. The Commission previously highlighted the importance of
evaluating
the governance structures and disclosures of finance
companies.13
22. Several debt issuers that are subsidiaries of publicly
owned entities provide limited or no corporate governance
disclosures.
In several cases, the parent entity provides detailed corporate governance
disclosures in its annual report and
on its website. However, these disclosures
do not refer to any governance structures in operation at the subsidiary
level. As
a minimum, these issuers should include statements as to
whether its parent’s corporate governance policies and
structures are
implemented at the subsidiary level.
23. The Commission expects these issuers to improve their
disclosures.
24. The Commission encourages investors and other stakeholders to
consider the extent and quality of disclosures when
evaluating an
entity’s corporate
12 The statutory requirements include the requirements in Section 211 of the Companies Act 1993, Section
11 of the Financial Reporting Act 1993 and Part 2 Subpart 1 of the Securities Markets Act 1988.
13 The Securities Commission, 2006, August 22. Finance
companies – an option for investors who understand the risk.
Available URL: http://www.seccom.govt.nz/new/releases/2006/240806.shtml
governance. However, investors and other stakeholders must take note
that disclosure alone does not guarantee that good governance
will occur in
practice.
FINDINGS BY PRINCIPLE
Principle 1: Ethical standards
Directors should observe and foster high ethical standards
25. Although most issuers reviewed (71%) disclose that high ethical
standards are important to them, only 57% disclose that
they have a written code
of ethics, with even fewer (31%) publishing this document. Only five
issuers (7%) disclose how
corporate conduct is actively monitored to ensure
compliance with the code of ethics.
26. These low percentages are surprising given that ethical practice is
central to all aspects of good corporate governance.
Governance structures are
unlikely to be effective unless boards are committed to high ethical standards
and conduct.
27. Publishing a code of ethics is considered best practice as it
signals to investors the quality of an entity’s corporate
values and
ethical standards. However, a code of ethics is only effective if directors
and employees actively adhere to monitor
and enforce the code in corporate
decision making and governance practices.
28. The Commission recommends that an entity demonstrates a commitment
to high ethical standards by:
(a) Ensuring it has a code of ethics relevant to the nature of its business;
(b) Disclosing in its annual report or on its website the existence of that code, and how that code has been implemented, monitored and enforced;
(c) Publishing its code of ethics on its website; and
(d) Disclosing relevant details of how the code has been
adhered to or breached, including any consequences. Disclosure
of such
information can be made in a manner which adheres to employment obligations and
does not breach commercial sensitivity.
29. Fisher & Paykel Appliance Holdings Limited provides a
good example of Principle 1 disclosures. The entity
provides clear
disclosures in its 2009 annual report and its Code of Conduct is published on
its website. The entity also disclosed
in its annual report that no serious
instances of unethical behaviour had been reported.
Principle 2: Board composition and performance
There should be a balance of independence, skills, knowledge,
experience, and perspectives among directors so that the
board works
effectively
30. The Principle 2 reviews focused on disclosures
relating to directors’ independence and executive/non-executive
status. Eighty-eight percent of issuers reviewed disclose information on
Principle 2.
31. The Commission has established specific guidelines for publicly
owned entities in relation to board composition and performance.
Most of the
publicly owned entities reviewed adhere to the following best practice
guidelines:
(a) 96% have a chief executive who is separate from the chairperson; (b) 81% have a majority of non executive directors;
(c) 79% have at least a third of directors who are independent; and
(d) 68% have an independent chairperson.
32. Sixteen issuers have not clearly disclosed their directors’ independence and/or executive status. On eight occasions, disclosures on the chairperson’s independence have been unclear. In addition, some issuers provide limited disclosures on directors’ qualifications and experience. Issuers must provide clearer and more comprehensive disclosures on these matters so that investors can assess whether the range and balance of independence, qualifications, skills
and diversity, such as gender,14 are appropriate for an effective
board.
33. To assist investors and other stakeholders in assessing a
board’s competence and independence, the Commission recommends
that
issuers disclose:
(a) The criteria for independence and how each independent director meets this criteria;
(b) Which directors are executive or non-executive;
(c) Which non-executive directors are independent directors, including disclosure of why any non-executive directors are not considered independent directors;
(d) Information regarding directors’ qualifications and value that they
contribute to the board; and
(e) Processes for and the outcomes of any board and/or board committee
performance reviews.
34. In its 2009 Annual Report, Comvita Limited (Comvita) provides a
good example of clear and informative disclosures on directors’
independence status and qualifications. Entities may wish to follow
Comvita’s example or consider other ways in which independence
status and
qualifications can be clearly disclosed e.g. via tables or charts.
14 Financial Reporting Council Limited, 2010, June. The UK Corporate Governance Code. Available
URL: http://www.frc.org.uk/corporate/ukcgcode.cfm.
Principle 3: Board committees
The board should use committees where this would enhance its effectiveness
in key areas while retaining board responsibility.
35. The majority of publicly owned entities reviewed provide
information on their use of board committees. For example,
87% of the
publicly owned entities reviewed disclose that they have an audit
committee and 64% have a remuneration
committee.
36. The reviews focused on disclosures relating to audit committees
because they are increasingly accepted as best practice
in corporate governance
internationally and in New Zealand.
37. Of the publicly owned entities with audit committees, 91% comprise
all non- executive directors, most of whom
are independent. The
Commission recommends that executive directors do not sit on audit
committees due to conflicts
of interest, particularly relating to financial
reporting, internal controls and audit processes.
38. Most issuers clearly disclose that their audit committee
chairpersons are not the chairpersons of the board, with the exception
of ten
issuers. One issuer’s board chairman is identified as the audit
committee chair and nine issuers did not clearly
disclose who was the audit
committee chair. For accountability purposes, the Commission recommends all
entities designate an audit
committee chair who is not the board chair.
39. Although most of the publicly owned entities reviewed disclose that
their audit committees have a charter, only 43% make
them publicly available.
Publishing board committee charters may enable investors and stakeholders to
better assess a board committee’s
effectiveness. The Commission recommends
that all entities ensure their board committee charters are publicly
available,
e.g. via the company website.
40. Approximately 65% of publicly owned entities with an audit
committee clearly disclose that they have an audit committee
member who
is a chartered accountant or a member who has other financial expertise. The
Commission recommends that all entities
clarify in their disclosures whether
their audit committee has appropriate financial expertise.
41. A lack of accounting expertise on an audit committee
may affect the committee’s ability to independently
assess compliance
with New Zealand International Financial Reporting Standards (NZ IFRS) and New
Zealand Generally Accepted Accounting
Practice (GAAP).
42. The global financial crisis (GFC) highlighted the importance of
having robust risk management policies, systems and practices
as part of
effective corporate governance.15 In particular, the GFC highlighted
the issue of the potential incompatibility between risk management and audit
committee functions.16
43. The issue is that the oversight and management of risk is a
forward-looking function as it relates to the identification
and oversight of
business risks in real- time. This contrasts with the audit committee’s
backward-looking risk function that
primarily focuses on the implementation of
policies already decided by the board. In addition, there is potential for
audit committees
to be over-burdened by increasing demands from statutory,
accounting and other requirements relating to the preparation of
financial
reports. Consequently, due regard may not be made to forward-looking risk
matters.
44. We note that most issuers reviewed had a single “audit and risk” committee that addressed both these functions. The Commission recommends that issuers consider establishing a separate risk committee that is responsible for the oversight and management of business risks and future risk strategy. The risk committee’s function and responsibilities should comprise oversight and counsel to the board on addressing the entity’s current and future business risks and
developing an effective future risk strategy for the
entity.17
45. A few issuers established corporate governance committees to ensure
that they maintain high standards of corporate governance
and remain informed of
international developments in corporate governance best practice. For example,
the Warehouse Group Limited’s
Corporate Governance Committee. The charter
for this committee is available on its website.
46. The Warehouse Group Limited’s board committee disclosures in
its 2008 annual report and on its website are a good
example of Principle 3
disclosures.
Principle 4: Reporting and disclosure
The board should demand integrity both in financial reporting and in the
timeliness and balance of disclosures on entity affairs.
47. Most issuers disclose some information in respect of Principle 4.
This includes disclosure of board and committee charters
as well as risk
management policies. As discussed in Principle 3, most issuers have audit
committees as a means of enhancing the
integrity of financial
reporting.
15 Walker, David, 2009, November 26. A review of corporate governance in UK banks and other financial industry entities – Final recommendations. Available URL: http://www.hm- treasury.gov.uk/walker_review_information.htm.
16 ibid. Recommendation 23.
17 See also Financial Reporting Council Limited, 2010, June.
The UK Corporate Governance Code. Available URL: http://www.frc.org.uk/corporate/ukcgcode.cfm
at C.2 Risk Management and Internal Control.
48. Listed issuers disclose little information on whether they
have compliance procedures to meet continuous disclosure
requirements. Of
the NZX listed issuers reviewed, 44% state that they adopt formal continuous
disclosure policies and procedures.
Some issuers publish their continuous
disclosure procedures as part of broader communications and disclosure policies,
e.g. Fisher
& Paykel Appliance Holdings Limited and Auckland International
Airport Limited.
49. Disclosing an issuer’s continuous disclosure procedures may provide greater confidence for investors and other stakeholders that they will receive material information on a timely basis. The existence of continuous disclosure compliance systems and their effectiveness has been considered by Australian
courts in assessing penalties for non-compliance.18 The Commission takes
compliance with continuous disclosure law seriously and has
recently commenced proceedings against an issuer alleging
non compliance
with this law. 19
50. The Commission recommends all listed issuers publish
any continuous disclosure policies, procedures and
practices in their annual
reports or on their websites. These policies should clearly outline those
responsible for ensuring compliance
by the company with continuous disclosure
regulations.
Principle 5: Remuneration
The remuneration of directors and executives should be
transparent, fair, and reasonable.
51. Most issuers disclose some information relating to
directors’ and executives’ remuneration. We consider that
the
following findings are a significant improvement on our 2005 reviews:
(a) 65% of all issuers disclose relevant details relating to their remuneration policy for directors and executives (2005: 40%);
(b) 34% of publicly owned entities have published that document in full
(2005: 25%); and
(c) 64% percent of publicly owned entities disclose they have a
remuneration committee.
52. We consider that improvements in disclosures relating to this
Principle may be a result of the increased scrutiny and sensitivity
of directors
and executives’ remuneration.
18 As can be seen in Australian Securities and Investments Commission v Chemeq Ltd (2006) 58 ACSR
169; 24 ACLC 806; [2006] FCA 936.
19 The Securities Commission, 2010, 13 April Commission to sue Nuplex Industries Limited and directors
Available URL:
http://www.seccom.govt.nz/new/releases/2010/1304101.shtml
53. Fisher & Paykel Healthcare Corporation Limited’s 2009
Annual Report provides clear remuneration disclosures
on its
remuneration committee and its remuneration policies for remuneration of
directors and senior management.
54. The importance of the relationship between remuneration and risk should be reflected in corporate governance policies, practices and disclosures. In particular, remuneration incentives should align with financial and non-financial performance measures relating to the issuer’s objectives, and be compatible with
risk management policies and systems.20
55. To further improve remuneration disclosures, the Commission recommends that issuers disclose the extent to which the issuer’s remunerations policies are aligned with the risk appetite and performance objectives of the issuer.21
Principle 6: Risk management
The board should regularly verify that the entity has appropriate
processes that identify and manage potential and relevant risks.
56. The Principle 6 reviews focused on whether issuers disclose if they
have a risk management policy and if so, whether it
is published.
57. Risk management disclosures have improved since the 2005 reviews,
with most issuers providing information in this area.
Sixty-eight percent of
issuers disclose that they have risk management policies (2005: 55%) and 34%
publish their policies in full
(2005: 14%).
58. Many issuers incorporate their risk management policies
within their audit committee charters. The need to consider
separating risk
management and audit functions is discussed under Principle 3.
59. However, few issuers disclose information on any significant
risks affecting their business. This is a serious
deficiency that must
be addressed in the corporate governance disclosures of New Zealand
entities.
60. Issuers can improve their risk management disclosures by including
information on:
(a) Its business model - an explanation of the basis on which the
issuer generates value over the long term and the strategy
for delivering the
long term objectives of the issuer; 22
(b) Its risk appetite - the nature and extent of risks the board is
willing to take to achieve its strategic objectives; and
20 Financial Reporting Council Limited, 2010, June. The UK Corporate Governance Code. Available
URL: http://www.frc.org.uk/corporate/ukcgcode.cfm.
21 Walker, David, 2009, November 26. A review of corporate governance in UK banks and other financial industry entities – Final recommendations. Available URL: http://www.hm-
treasury.gov.uk/walker_review_information.htm, Recommendation 30
22 Financial Reporting Council Limited, 2010, May. Revisions to the UK Corporate Governance Code
(Formerly the Combined Code). Available URL: http://www.frc.org.uk/corporate/ukcgcode.cfm.
(c) The nature and magnitude of material risks and how the board manages
those risks.
This information can be presented in a risk matrix, an example of
which is included in Kingfish Limited’s risk
management policy.
Principle 7: Auditors
The board should ensure the quality and independence of the external audit
process.
61. Most issuers reviewed disclose that they have processes for
ensuring the quality and independence of external auditors.
This is
consistent with most issuers having an audit committee23 and by
the low fees for other services provided to auditors. The average fee
composition paid to auditors comprises:
(a) 77% for audit services;
(b) 10% for audit and/or assurance related services; and
(c) 13% for other fees.
62. Forty-four percent of issuers reviewed only paid fees to
auditors for audit services and audit/assurance related
services. This
indicates that most issuers reviewed still use their auditors for
consulting or other services. All such
services should be subject to the
approval of the board or audit committee.
63. In several instances, the audit fees paid have not been disclosed
because the fee was borne by another party e.g. an entity’s
parent or
manager. Where this is the case, we recommend issuers disclose additional
information on how auditor independence is maintained.
For example, subsidiaries
could disclose whether the parent’s audit committee directly monitors all
fees paid to the subsidiary’s
auditors.
Principle 8: Shareholder relations
The board should foster constructive relationships with shareholders
that encourage them to engage with the entity.
64. Disclosures on shareholder relations are low. Thirty-eight percent
of publicly owned entities state that they have shareholder
relations policies
and only 30% publish these policies.
65. Good governance requires structures and behaviour that
promote good shareholder relations. Publicly owned
entities should publish
clear shareholder relations policies that emphasise effective shareholder
communications and shareholder
participation. Issuers will be better placed to
attract the capital and support they need if shareholder-entity
relationships
are cooperative and mutually responsive.
66. The Commission recommends entities establish and publish their
shareholder relations policies. Entities should disclose
any steps adopted to
ensure that shareholders can actively participate in annual and special
meetings.
23 Refer to Principle 3: Board Committees.
67. Good disclosers on this Principle include Fonterra Co-operative
Group Limited (Fonterra) and Fisher & Paykel Healthcare
Corporation Limited
(FPH). Fonterra established a Shareholder Relations Committee and discloses
its shareholder relations policy
(as part of its board charter) on its website.
FPH publishes its Shareholder Communication Policy Summary on its
website.
68. Institutional investors have an important role to play in the corporate governance framework. An institutional investor should make an informed decision on whether to actively engage with the issuer on governance matters. In the UK, the Institutional Shareholders’ Committee’s Code on the Responsibilities of Institutional Investors is designed to improve the quality of dialogue between institutional investors and the entity to improve long-term returns to investors, decrease the risk of adverse outcomes as a result of poor strategic decisions and to foster effective governance. In particular, Principle 4 of the Code notes that institutional investors should consider intervention when they have concerns about the issuer’s strategy and performance, its governance or its approach to the
risks arising from social and environmental matters.24
69. The Commission recommends that New Zealand institutional investors
continue to actively engage with issuers in order to
foster good corporate
governance and improved long-term returns on investment. We recommend that
institutional investors review
the Institutional Shareholders’
Committee’s Code on the Responsibilities of Institutional Investors
published in the
UK.
Principle 9: Stakeholder interests
The board should respect the interests of stakeholders within the context
of the entity's ownership type and its fundamental purpose.
70. Disclosures on stakeholder interests remain the lowest across all Principles at
38%. Few issuers (26%) disclose that they have stakeholder interests’
policies and these are generally not published.
71. The Commission recommends that issuers establish and
publish clear stakeholder policies. These policies
should be tailored
appropriately to the issuer’s nature, purpose and operations. Policies
should outline issuers’
relationships with significant stakeholders and
evaluate whether issuers’ conduct adheres to widely-accepted
ethical,
social and environmental norms. In particular, debt issuers
should have clear policies for their relationships with debt
security
holders.
24 Institutional Shareholders Committee, 2009. Code on the Responsibilities of Institutional Investors. Available URL: http://institutionalshareholderscommittee.org.uk/sitebuildercontent/sitebuilderfiles/ISCCode161109.pdf.
The Walker Report recommends that both UK and overseas institutional
investors adopt the Code: see Recommendation 17. This code
has been used as the
basis for the UK Stewardship Code published by the UK Financial Reporting
Council (FRC) in July 2010. The FRC
encourages all institutional investors to
report if and how they have applied the Code. The UK Stewardship Code is
available online
at
http://www.frc.org.uk/corporate/investorgovernance.cfm (accessed, 8 July
2010).
72. Good disclosers include:
(a) The Warehouse Group Limited, which discloses stakeholder interests
in a separate social and environmental report;
(b) Trustpower Limited, which has a Sustainability Outlook section
which details how it engages with and responds to key stakeholders’
interests and concerns (including the environment); and
(c) New Zealand Post Limited, which discloses how it engages
with stakeholders and how it meets each stakeholder group’s
interests in
its annual report.
73. To meet Principle 9, the Commission recommends entities to report on Environmental, Social and Governance (ESG) matters relevant to each entity’s purpose, nature and operations. Investors are increasingly considering ESG performance when valuing companies.25 Entities should therefore provide transparent and meaningful ESG disclosures in annual reports, on websites and
through continuous disclosure requirements.
74. The Global Reporting Initiative (GRI) is widely considered a leading standardised framework for ESG reporting (www.globalreporting.org). In its
2009 review, the Sustainable Investment Research Analyst Network (SIRAN)
found that 55 of the companies in the United States S&P100
made specific
reference to GRI in their sustainability reports.26 In 2009, 10 New
Zealand companies reported under the GRI. We recommend entities
adopt GRI frameworks as a means of
achieving Principle
9.
25 For example, the New Zealand Super Fund considers ESG matters as part of its investment strategy. (http://www.nzsuperfund.co.nz)
26 See http://www.siran.org/projects_s_and_p_reporting_comparison.php. New Zealand is following the
ESG trend.
CONCLUSION
75. Transparent disclosures are central to good corporate
governance. The Commission has found that many of
the issuers reviewed
provide clear and relevant disclosures in relation to their board composition,
use of board committees, remuneration
of executives and directors, risk
management and use of external auditors.
76. However, there is scope for New Zealand entities to improve their
corporate governance policies, practices and disclosures.
In particular, we
recommend entities reconsider their disclosures on ethical standards, risk
management, remuneration, shareholder
relations and stakeholder interests.
For example, entities should consider whether it is appropriate to
separate
their risk management and audit committee functions.
77. The Commission, along with other regulators internationally, is
reconsidering corporate governance best practice. Therefore
it is important for
New Zealand entities to remain up-to-date on developments in corporate
governance and appropriately implement
these in their organisations.
78. The Commission appreciates the cooperation and positive responses
received from issuers in relation to these reviews. We
wish to thank these
issuers for their efforts in promoting good corporate governance in New
Zealand.
79. The Commission will continue to review issuers’
corporate governance disclosures as part of its Corporate
Governance Review
Programme.
80. We welcome any comments or enquiries from the public relating to this
report.
APPENDIX 1: THE SECURITIES COMMISSION PRINCIPLES FOR CORPORATE
GOVERNANCE
1. Ethical standards: Directors should observe and foster high
ethical standards.
2. Board composition and performance: There should
be a balance of independence, skills, knowledge, experience, and
perspectives among directors so that the board
works effectively.
3. Board committees: The board should use committees where
this would enhance its effectiveness in key areas while retaining board
responsibility.
4. Reporting and disclosure: The board should demand integrity
both in financial reporting and in the timeliness and balance of disclosures on
entity affairs.
5. Remuneration: The remuneration of directors and
executives should be transparent, fair, and reasonable.
6. Risk management: The board should regularly verify
that the entity has appropriate processes that identify and manage potential
and relevant
risks.
7. Auditors: The board should ensure the quality and
independence of the external audit process.
8. Shareholder relations: The board should foster constructive
relationships with shareholders that encourage them to engage with the
entity.
9. Stakeholder interests: The board should respect the
interests of stakeholders within the context of the entity's ownership type and
its fundamental purpose.
APPENDIX 2: LIST OF ISSUERS REVIEWED
AMP Investments’ World Index Fund Opus International Consultants Limited
AMP NZ Office Trust Origin Energy Contact Finance No.2 Limited
Aquiline Holdings Limited Postie Plus Group Limited
ASB Capital Limited Powerco Limited
Auckland International Airport Limited Property Finance Group Limited Australian 20 Leaders Funds Property for Industry Limited Barramundi Limited Pumpkin Patch Limited Beneficial Finance Limited Quayside Holdings Limited
BLIS Technologies Limited Ravensdown Fertilizer Co-operative Limited
Boston Finance Limited Renaissance Corporation Limited Cavalier Corporation Limited Satara Co-operative Group Limited Celsius New Zealand Income Fund Series 1 Savoy Equities Limited
Comvita Limited Sky Network Television Limited
Delegats Group Limited Smartpay Limited
Diligent Board Member Services Inc South Canterbury Finance Limited Dorchester Finance Limited Southern Travel Holdings Limited Fidelity Capital Guaranteed Bond Limited Southland Building Society
Fisher & Paykel Appliance Holdings Limited Southport New Zealand Limited
Fisher & Paykel Healthcare Corporation Limited St Laurence Limited Fonterra Co-operative Group Limited Strategic Finance Limited Genesis Research and Development Corporation Limited Syft Technologies Limited
Geneva Finance Limited The New Zealand Refining Company Limited
Hallenstein Glasson Holdings Limited The Warehouse Group Limited
Horizon Energy Distribution Limited TRS Investments Limited IMP Diversified Income Fund Limited Trustpower Limited Infratil Limited Turners Auctions Limited Kingfish Limited UDC Finance Limited
MARAC Finance Limited Westpac New Zealand Limited
Marlin Global Limited Widespread Energy Limited Methven Limited Works Finance (NZ) Limited Mighty River Power Limited
New Image Group Limited
New Zealand Farming Systems Uruguay Limited
New Zealand Post Limited
Northland Port Corporation (NZ) Limited
Nufarm Finance (NZ) Limited Nuplex Industries Limited NZF Group
Limited
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