FMA and OECD update their Corporate Governance Principles and Guidelines for the new corporate environment

Wednesday 18 February 2015

Authors: Gavin Macdonald and Alexander Bond

​​​​​At the end of last year, the Financial Markets Authority (FMA) released the “Corporate Governance in New Zealand – Principles and Guidelines” handbook (Updated Handbook) which updates and replaces the Corporate Governance Handbook that was first produced by the then Securities Commission in 2004.

This follows on from a consultation on a draft version of the Updated Handbook in November 2014. For details of that consultation see our earlier client update here and the summary of FMA’s responses to the submissions it received on that consultation here.

Like the 2004 edition, the Updated Handbook is intended to serve as a reference guide for directors, executives and advisers in their decisions about how best to apply nine key corporate governance principles, taking into account the current environment and relevant international best practice. It also supports the principles underpinning the Financial Markets Conduct Act 2013, which became fully effective on 1 December 2014.

The FMA has indicated that the Updated Handbook may be subject to further updates following the review of the 2004 OECD Principles of Corporate Governance, which was also initiated in late 2014 and is expected to be completed later this year.

In this client update we set out information as to how the Updated Handbook applies to boards and management, reiterate some of the key changes to the 2004 edition from our earlier client update and suggest action to be taken by listed issuers. We also address some of the proposed changes to the 2004 OECD Principles of Corporate Governance which may be reflected in a later version of the FMA’s Updated Handbook and, in the case of listed issuers, in future amendments to the NZX Main Board Listing Rules (the NZX Listing Rules).

The FMA’s Updated Handbook

Application

Compliance with the Updated Handbook is not required by legislation or the NZX Listing Rules. However, the FMA has said that it expects entities that have economic impact in New Zealand, or are otherwise accountable to the public, to comply. This includes listed issuers, other issuers of securities, state-owned enterprises, community trusts, public sector entities, and may also include other companies. Given such a wide intended audience, the nine core principles in the Updated Handbook (which have not changed since the 2004 edition) are drafted broadly and are not prescriptive. Not all of the principles will be relevant to every organisation.

The Updated Handbook states that boards and management should consider the nature and needs of their businesses when considering how each principle applies to their particular entity and should be prepared to explain how they comply with each principle. This differs from the ‘comply or explain why not’ policy used by NZX and ASX in their respective corporate governance codes.

The FMA notes that where detailed reporting is already required under another corporate governance code (such as those published by NZX and ASX), there may be no need to supply additional information against a particular principle set out in the Updated Handbook.

How to report against the principles

Implementing each of the principles set out in the Updated Handbook includes reporting on corporate governance practices to shareholders and other stakeholders, which, for most entities can be achieved in the annual report, or through links to online content. The FMA makes it clear that directors should consider their own, and their particular entity’s, performance against each of the principles before information is prepared. The principles should be ‘owned’ by the board, rather than being approached through a simple ‘tick the box’ compliance system delegated entirely to management.

The FMA recommends that listed issuers that do not cover all of the corporate governance areas set out in the Updated Handbook in their reports under NZX Listing Rule 10.4.5(h) should examine their practices with a view to adopting and reporting on all of the principles.

Key changes to the 2004 handbook

Key changes to the 2004 handbook in the Updated Handbook include:

  • the acknowledgement that reporting against the principles can be achieved by publishing on investor relations pages of company websites in addition to, or instead of in, the annual report;

  • more detailed recommendations on board composition, particularly around diversity requirements which have been expanded to include considerations of gender (consistent with the 2012 amendments to the NZX Listing Rules), ethnicity, cultural background, age and specific relevant skills;

  • greater recognition of the role of board committees, particularly audit committees, and the need to adjust their use according to the size and particular needs of the relevant board;

  • further discussion on financial reporting and timeliness and balance of corporate disclosures. For listed issuers, the FMA recommends that the board has appropriate policies and procedures in place to, among other things, enable timely disclosure where it may not be possible for the board as a whole to be involved in a decision to release material information, review continuous disclosure compliance at every board meeting and ensure that directors and officers of the issuer understand their disclosure obligations; and

  • the guidelines on ethical standards have been brought into line with the ASX Corporate Governance Principles and Recommendations released in March 2014.

OECD Principles of Corporate Governance

The OECD is also conducting a review of the OECD Principles of Corporate Governance, which were last updated in 2004. The review process started in 2014 and the final version of the revised OECD Principles is scheduled for completion in 2015. As part of this process, the OECD invited public comment on a revised draft text of the OECD Principles, which was released in November 2014.

The OECD Principles of Corporate Governance are a non-binding public policy instrument that can be adapted to the specific circumstances of individual countries and is intended to:

  • assist governments and regulators to improve their legal, regulatory and institutional framework for corporate governance; and

  • provide guidance for stock exchanges, investors, corporations and others with a role in the process of developing good corporate governance.

Changes to the OECD Principles and recommendations set out in the revised draft text address recent developments or issues in capital markets. The changes and recommendations that may be most relevant to New Zealand’s listed issuers include:

  • fairness be added to the values corporate governance should promote (alongside transparency and efficiency) to ensure effective supervision and enforcement;

  • institutional investors should disclose their policies with respect to corporate governance, and those in a fiduciary capacity should disclose how they exercise voting rights and even their voting records (this is relevant to institutional investors rather than listed issuers themselves); rules should be put in place to allow for the monitoring of related-party transactions, including both board and shareholder approval;

  • prohibitions should be introduced for abusive self-dealing, being when persons having close relationships to a company exploit those relationships to the detriment of the company and its shareholders; and

  • human rights ought to be added as an item for non-financial reporting, alongside business ethics and the environment.

The revised draft text of the OECD Principles also addresses certain issues regarding shareholder rights, including:

  • the potential use of electronic technologies to allow shareholders to participate effectively and aid in curbing unfair voting practices;

  • the need for shareholders to be sufficiently informed about, and have the right to approve or participate in, decisions concerning fundamental corporate changes; and

  • stronger requirements around the disclosure of remuneration agreements for directors and senior executives, including a requirement that any material changes to an equity-based scheme be subject to specific shareholder approval, as well as the suggestion of specific committee management of remuneration and greater board management.

Required action by listed issuers

Listed issuers do not need to take any immediate action in relation to either the FMA’s Updated Handbook or the proposed changes to the OECD Principles of Corporate Governance. As noted above, neither are legally binding. The FMA’s Updated Handbook can be considered as an overlay on the existing obligations listed issuers have, including under the NZX Listing Rules and the Financial Markets Conduct Act 2013. These principles will not be binding on listed issuers without a law change or an amendment to the NZX Listing Rules.

However, if listed issuers ultimately wish to be able to confirm to the market that their processes and procedures are consistent with the principles set out in the FMA’s Updated Handbook, listed issuers should review the Updated Handbook and put in place any processes and procedures necessary to comply with and report against them, where they are applicable. In particular, listed issuers should identify principles set out in the Updated Handbook that are relevant to them and incorporate those within their corporate governance manuals and other documents (for example, the additional guidance in respect of compliance with the continuous disclosure regime).

If the FMA’s Updated Handbook is updated again to reflect any changes made to the OECD Principles later this year, listed issuers will also need to check whether any of those changes are applicable to them. Listed issuers should take note of any changes made to the OECD Principles as such changes may be incorporated by NZX in future amendments to the NZX Listing Rules.

Materials referred to in this client update

Copies of the documents referred to in this client update are available at the following links:


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.

Related areas of expertise
  • Corporate governance and advisory