A new corporate governance code released by the NZX today will better align stock exchange governance reporting framework with Financial Markets Authority guidelines on corporate governance.
NZX published its final NZX Corporate Governance Code (NZX Code) following a year-and-a-half long review process. Along with the better alignment between the stock exchange and market regulator on governance, the NZX Code also provides issuers with flexibility to tailor their corporate governance practices to the needs of their company, and encompasses a number of areas of growing importance to investors including environmental and social reporting, health and safety and the reporting of director and CEO remuneration.
When does it apply?
The new code will replace the existing Best Practice Code in the NZX Listing Rules on 1 October 2017. The NZX Code must be reported against for reporting periods ending 31 December 2017 and beyond. A Class Ruling also allows issuers to report against the NZX Code in annual reports prior to the NZX Code coming into effect on a voluntary basis.
What are the changes?
New tiered approach
The NZX Code follows a three-tiered approach:
- the top tier sets out 8 principles, which are closely based on those contained in the Financial Markets Authority's 2014 "Corporate Governance in New Zealand Principles and Guidelines" handbook for directors, executives and advisers (FMA's Corporate Governance Handbook),
- the second tier sets out recommendations which will apply on a "comply or explain" basis. This differs from NZX's current approach, which requires an explanation of how an issuer's corporate governance practices materially differ from the NZX Code but not necessarily an explanation why,
- the final tier contains commentary which explains how issuers can meet each recommendation and outlines additional optional guidance for issuers in areas where NZX thinks the suggested approaches reflect good practice.
In addition to the NZX Code, the mandatory corporate governance provisions set out in the NZX Listing Rules will continue to apply.
The reporting obligations relate only to the recommendations set out in the NZX Code and may be disclosed in the annual report or on the issuer's website. The "comply or explain" requirement provides flexibility for an issuer to adopt other corporate governance practices considered by the board to be more appropriate – for example, due to its size or stage of development. This regime allows shareholders to decide whether the set of standards applied by an issuer are appropriate. If a shareholder does not accept the explanation, the shares can be sold – creating a market sanction rather than a legal one.
The NZX Code reflects developments in financial markets since the original code was published in 2003. NZX has focused on four areas which have gained increased importance for investors in recent years. This includes:
- environmental, social and governance (ESG) reporting,
- reporting on board diversity,
- health and safety risk management, and
- director and CEO remuneration reporting requirements.
Alignment with the FMA's guidance
The eight principles around which the NZX Code has been structured are aligned to the nine principles in the FMA's Corporate Governance Handbook. The additional ninth principle in the FMA's Corporate Governance Handbook ("Stakeholder Interests") has been folded into the other eight principles in the NZX Code. Issuers who are currently choosing to report against the FMA's Corporate Governance Handbook will no longer have to try to match their reporting to two different reporting codes. This is to help ensure that there is a more consistent approach between the respective regimes.
Background to the changes
The NZX commenced its review of the existing Best Practice Code in November 2015, with the aim of creating an updated Code that reflects current best practice and improved corporate governance practices. A series of discussion documents, consultation papers and submissions by industry participants has resulted in the final NZX Code.
The upcoming changes present an appropriate moment for listed issuers to review and update their corporate governance practices and policies, including training.
Once the NZX Code is in force, it will be important for issuers:
- to review and update their corporate governance practices and policies on an ongoing basis, rather than focussing only on the annual reporting obligation, and
- if the issuer chooses to adopt alternative corporate governance practices to those recommended in the NZX Code, to carefully consider and record why they are taking that approach so they are in a position to disclose those reasons with sufficient clarity.
Further background information and a link to the NZX Code is available on NZX's website: click here.
If you would like guidance on how the NZX Code will affect your current corporate governance practices and annual reporting requirements, our team of specialists are available to assist.
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.