NZX begins second round of consultation on NZX Corporate Governance Code

16 August 2022

NZX has released an exposure draft of the changes it proposes for the NZX Corporate Governance Code, following the initial round of submissions on its 2021 review document. This is accompanied by a consultation paper which seeks further feedback on certain aspects of its proposed changes. Submissions close on 23 September 2022.

NZX has also released an exposure draft of the changes it proposes to make to its ESG Guidance Note, which are complementary to the proposed amendments to Principle 4 of the Code. Submissions on the exposure draft and the accompanying consultation paper also close on 23 September 2022.

NZX expects the revisions to the Code will take effect for a listed entity’s first full financial year commencing on or after 1 April 2023.

NZX has also confirmed that a new corporate governance body, the NZX Corporate Governance Institute, will be established later this year to provide NZX with recommendations in relation to the development of the Code and listing rule settings that apply to the corporate governance practices of issuers on the NZX Main Board. The Institute will initially be convened for an establishment phase of one year, after which NZX will assess its effectiveness and determine whether to continue the Institute on a permanent basis.

What is changing?

The Code’s framework

First, we are pleased to see that no changes are being made to the ‘comply and explain’ model that the Code is based on. There was general support for its retention, and according to sample testing carried out by NZX, for the three year period since the Code was introduced there has been a general shift to a greater adoption of the Code recommendations under the new ‘comply or explain regime’.

However, NZX is proposing to provide greater guidance in the introduction of the Code on how the non-adoption of a recommendation should be reported, as well as making specific changes to the commentary in relation to particular recommendations to enhance disclosure. There will also be a rule change to ensure that ‘explain’ disclosures are provided for past reporting periods where an issuer has failed to explain a different approach in the relevant reporting period.

Amendments to the Code Principles

The proposed amendments relate to a number of Code Principles, both in the recommendations (which make up the ‘comply or explain’ reporting requirements) and in the commentary that provides guidance as to the policy intent of a recommendation, and the matters that an issuer may wish to consider when assessing its corporate governance practices in the context of a recommendation. A brief outline of the key proposed changes are summarised below.


Proposed amendments

Principle 1 (which will be renamed as ‘Ethical Standards’)

Commentary to Recommendation 1.1 – How should a breach of ethics be handled?

· New commentary recommends issuers consider whether it is appropriate to provide access to an external agency for whistleblowing purposes, and to note that issuers should ensure they understand their legislative responsibilities in relation to protected disclosures (in light of the new Protected Disclosures Act which came into effect on 1 July 2022).

Commentary to Recommendation 1.1 – How can the code of ethics be measured?

· Provides guidance that NZX expects issuers to provide training to staff in relation to codes of ethics at least every three years, and reinforces NZX’s expectations around disclosure relating to the frequency of training.

Principle 2 – Board Composition and Performance

Recommendation 2.4 – Disclosures relating to an independence determination

·       Introduces a new ‘comply or explain’ recommendation as part of recommendation 2.4, to encourage issuers to provide disclosure of their reasons for a determination of director independence where one of the independent assessment factors contained in the Code commentary applies to the director. This change aligns with the approach taken in Australia.

Commentary to Recommendation 2.4 – Factors to be considered when determining director independence

·       New commentary will emphasise that the independent assessment factors contained in the Code are examples of interests and relationships that may preclude a director from being regarded as independent, and are not the only factors that a board should consider when making an assessment of a director’s independence.

This is to stop a ‘tick-box’ approach by issuers when determining independence, and to encourage a more holistic assessment consistent with the approach taken in the ASX Code. (A listing rule change to the definition of ‘Disqualifying Relationship’ also will be made to clarify this approach.)

·       Technical amendments have been made to the drafting of some of the factors, including:

o  changes to the length of time (from 12 months to three years) within which previous relationships with an external audit firm are relevant; and

o  changes to the factor relating to close family ties, to refer to close personal relationships, which includes personal, business or social connection, reflecting that these relationships can also affect a director’s independence (and to also align with the approach taken in Australia).

Commentary to Recommendation 2.4 – Length of tenure

·       New commentary emphasises that where a director’s tenure exceeds twelve years, the director’s tenure may be a factor that precludes the director from being regarded as independent.

NZX note that the inclusion of this change is to encourage issuers to carefully consider the independent status of a director after that length of tenure. It is not intended to prevent a board from making a determination that a long tenured director is independent, but it will encourage greater disclosure of the issuer’s reasons for such a determination.

Commentary to Recommendation 2.4 – Consequences of a determination that a director is not independent

·       In an attempt to address the stigma that is often associated with a determination that a director is not independent, the commentary now clarifies that the listing rules set the board composition requirements, and that an issuer is permitted to have a certain number of non-independent directors in accordance with those requirements.

Commentary to Recommendation 2.4 – Succession planning

·       Includes new commentary noting issuers should publish information relating to the succession planning arrangements for the issuer’s board.

Recommendation 2.5 – Diversity policy

·       Introduces a new ‘comply or explain’ recommendation proposing that issuers within the S&P/NZX 20 Index at the commencement of a reporting period should have a target for achieving board gender diversity which is to have at least 30% of its directors being persons who self-identify as male and at least 30% of its directors being persons who self-identify as female, over a specified period which the issuer may determine. This aligns with the approach taken by ASX for issuers in the S&P/ASX 300 Index.

Commentary to Recommendation 2.5 – Gender pay gap reporting

·       NZX is proposing that issuers within the S&P/NZX 50 Index and with more than 50 employees may wish to consider providing gender pay gap reporting information on their website or in their annual report.

Recommendation 2.9 and new Recommendation 2.10 – Independence of the chair and the CEO

·       Recommendation 2.9 is being split into separate recommendations, to ensure that appropriate disclosures are provided in relation to both limbs of the current recommendation.

·       New recommendation 2.10 recommends that the chair of the board should be independent of the board’s CEO, whether or not the chair is independent. This amendment is consistent with the corporate governance expectations of ASX, SGX and the UK Financial Reporting Council, and recognises the importance of the separation between the management of an issuer and the chair’s governance role, in enabling a board to effectively challenge management

Principle 3 – Board Committees

Commentary to Recommendation 3.1  Audit committees

·       To enhance the visibility of the skills and experience of audit committee members, NZX is proposing, similar to the approach taken in Australia, that issuers should consider disclosing the qualifications and experience of audit committee members.

·       Includes commentary that members of the audit committee should be non-executive directors.

Commentary to Recommendation 3.6  Takeover committees

·       Includes commentary that an issuer should consider disclosing the composition of its takeover committee and confirm that the committee’s members are independent of the bidder, once the takeover committee has been established.

Principle 4 – Reporting & Disclosure

Split Recommendation 4.3Now just financial reporting

New Recommendation 4.4Non-financial reporting

·       Changes are being made to clarify the operation of the recommendations in relation to non-financial reporting, and to reflect the new legislative climate related disclosures framework. However, there have been no changes made to the ‘comply and explain’ obligations.

NZX note that they will not introduce changes to reflect modern slavery reporting requirements in recognition on the government’s current consultation regarding legislative change in this area.

Commentary to new Recommendation 4.4 – ESG disclosures

·       Amendments made to the commentary relating to the location of ESG disclosures, to note that where an issuer provides ESG reporting on its website that its annual report should include a clear statement as to where that information is available.

·       New commentary encourages issuers to report the process by which their non-financial reporting disclosures have been prepared where it has not been subject to formal review of audit by an external auditor. This reflects amendments made to the ASX Code in 2019.

Commentary to new Recommendation 4.4 – Climate related disclosures

·       Consequential changes have been made to the commentary to alert issuers to the new climate reporting requirements under the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act, and direct issuers to NZX’s ESG Guidance Note. This is being updated to provide additional material to support issuers in becoming familiar with the new reporting requirements.

Principle 5 – Remuneration

Recommendations 5.1 and 5.2 – Clarification of recommendations applying to directors and executives

·       NZX is proposing drafting changes to clarify the recommendations and commentary that apply to director and executive remuneration, respectively.

Commentary to Recommendation 5.1 – Independent advice

·       Changes to the commentary, such that where an issuer has relied on an independent remuneration report in formulating its director remuneration arrangements, that the issuer should disclose a summary of the report.

Commentary to Recommendation 5.2 – Non-financial goals when setting executive performance-based remuneration

·       Amends the commentary that relates to the elements that are relevant considerations when setting performance-based remuneration for executives, to expand those considerations to include non-financial goals which have been identified by an issuer as integral to its strategy, and the values of the issuer.

·       Changes the commentary to encourage issuers to disclose how its executive remuneration arrangements align with its strategy and performance objectives, and generic eligibility and vesting hurdles for any long-term incentive scheme that forms part of those arrangements.

Principle 6 – Risk Management

Commentary to Recommendation 6.1 – Description of risk management framework

·       Amends commentary to note that an issuer should include in its annual report a summary of its risk management framework to provide investors with more clarity as to how an issuer has identified the material risks to its business.

Principle 8 – Shareholder Rights & Relations

Recommendation 8.2 – Shareholder Meetings

·       Modifies the recommendation to promote shareholder meeting arrangements being designed in a manner that encourages shareholder participation.

Commentary to Recommendation 8.2 – Hybrid meetings preferred and virtual meeting guidance


·       Changes to the commentary to encourage issuers, particularly those in the S&P/NZX 50 Index, or those with geographically diverse registers to facilitate hybrid meetings.

·       Changes to the commentary to provide guidance as to when it may be appropriate for an issuer to hold a virtual only meeting, and a recommendation that issuers can help investors participate and understand how the virtual elements of a meeting will be conducted by publishing a virtual meeting guide ahead of the meeting that describes various aspects of the meeting.

NZX ESG Guidance Note

In conjunction with this review of the Corporate Governance Code, NZX is also reviewing its 2017 ESG Guidance Note which sets out NZX’s regulatory guidance for issuers in relation to environmental, social and governance (ESG) reporting practices.

The primary objective of the review is to ensure that the Guidance Note aligns with the proposed changes to the recommendations and commentary in relation to non-financial reporting that form part of Principle 4 of the Code outlined above. In addition, NZX is also interested in receiving feedback as to whether other settings in the Guidance Note should be revised, to better assist issuers in providing ESG reporting to investors and other stakeholders.

Further information

For further details on both of these consultations refer to NZX’s website here.

If you would like assistance with your submissions or have any questions about the matters raised in either of these consultations, please get in touch with the contacts listed or your usual Bell Gully adviser.

Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.