The Minister of Commerce asked the Securities Commission in June 2003 to take a lead in developing corporate governance Principles for New Zealand. The Commission is pleased to present these Principles after an extensive process of public consultation.
The public response showed significant support for a principles-based approach to corporate governance. We agree that this is a constructive way to maintain high standards of corporate governance, when combined with effective reporting on corporate governance practices.
This document sets out Principles developed by the Commission that will help New Zealand directors and boards of all types of entities to achieve consistently high standards in carrying out their corporate governance duties and responsibilities. The Principles support existing laws and regulations. The Principles do not impose any new legal obligations.
The Principles build on the Commission's consultation, as well as other work that has been done in New Zealand and overseas. New Zealand must heed policies and practices in other countries and aspire to standards of behaviour consistent with rising expectations in international capital markets.
The quality of corporate governance can play a key role in corporate performance. Improving governance should be a priority for all corporate entities. The Principles set out in this document are broadly stated to cover a wide range of companies and other entities that have economic impact or are accountable to investors or to the public more generally.
The Principles also recognise that different types of entities can take different approaches to achieving consistently high standards of corporate governance. Good governance practices should reflect the nature of each entity, and contribute to improved performance and accountability for that entity.
Transparency through high standards of reporting and disclosure is of paramount importance. Shareholders and other stakeholders can properly evaluate an entity and its governance only if they are fully informed. Accordingly the Principles focus strongly on reporting and disclosure of corporate governance structures and processes, as well as on reporting of financial and other material matters. Listed issuers are already subject to requirements under the Listing Rules to disclose the corporate governance practices they have adopted. These Principles should not increase the disclosure requirements for the many listed issuers whose governance practices and reporting are already of a high standard.
The Commission received a very good response to the consultation. We thank all those who took part for their constructive and thoughtful contributions.
Corporate governance practices in New Zealand are, by and large, of a good standard. The behaviour of boards and directors is the key to good corporate governance. We are confident the Principles will help directors and executives achieve the highest possible standards. We look forward to seeing the Principles implemented by New Zealand entities.
Good corporate governance should increase confidence in boards and management, and attract support from investors and other stakeholders. Ultimately it should make businesses more productive, competitive and financially sustainable.
Jane Diplock AO
Chairman
| 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. |
| NZX | New Zealand Exchange Limited. |
| 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. |
| Substantial shareholder | a person who has a relevant interest in 5% or more of the voting securities of an entity, as defined in the Securities Markets Act 1988. |
These 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.
Developing the Principles
The Commission's consultation process in 2003 sought to identify the level of consensus within New Zealand around:
Responses indicated a high level of consensus on these broad issues, although opinions often varied on questions of detail.
The public views from our consultation have helped develop these corporate governance Principles. As well, the Commission has been assisted by other work done in New Zealand, in particular by New Zealand Exchange Limited, the Institute of Directors in New Zealand, and the Institute of Chartered Accountants of New Zealand. We also researched international developments, particularly those from the OECD, and in Australia, the United Kingdom, and the United States.
This work has led to Principles which are consistent with international practice and reflect the views of most people who took part in the project.
Applying the Principles
A solid international body of empirical research supports the argument that fundamental aspects of corporate governance can play a key role in corporate performance. This has been demonstrated in recent work by the OECD, assessing implementation of its 1999 corporate governance principles. This should make improved governance a priority for all corporate entities.
Accordingly, the Commission has developed these Principles to 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. However, 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 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.
Implementation of the Principles by issuers
The Commission's primary focus, arising from its statutory functions, is on issuers of securities - those entities who raise or have raised investment money from the public. Issuers are a diverse group including some private companies, Crown-owned entities, and local authorities as well as entities listed on NZX's markets. The Principles are consistent with the NZX Corporate Governance Best Practice Code and the Listing Rules.
Issuers are entrusted with money invested with them by the public. All issuers have a responsibility to their investors to pay close attention to corporate governance practices with a view to achieving high standards of corporate performance and accountability. Such standards can in turn contribute to confidence in our capital markets.
Particular attention has been paid to publicly owned entities. By this we mean public companies and other entities, such as some collective investment schemes, which have investors with similar ownership interests to company shareholders, and similar rights to vote on matters affecting the entity. For the purposes of this document we have used the term "shareholders" to include these investors.
Publicly owned entities are entities where ownership is held by many people, but the control of the entity is the responsibility of the board. In these circumstances it can be very difficult for the large number of owners to hold the directors to account. This problem can be reduced when directors observe governance practices that promote the interests of the owners of the entity.
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 do not impose any new legal obligations on issuers. However, they set out standards of corporate governance that the Commission expects boards of issuers to observe and to report on to their investors and other 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.
Guidelines are included which set out structures and processes to help issuers to achieve each Principle. Some guidelines are addressed specifically to publicly owned entities and other issuers. Others can be used by all entities.
The guidelines do not detract from our view that different entities can find different ways to achieve good corporate governance. Some of the guidelines may not suit particular issuers for such reasons as size, board composition, or cost. Directors and executives will be best placed to decide the detail of structures and processes for implementing the Principles for any given entity.
The Commission published a statement on corporate governance in November 2002. This briefly covered many issues that are more fully dealt with in these Principles. It also commented on the regulatory environment that will encourage good governance by issuers.
Although the Principles are primarily for boards and directors, others also have an important role in maintaining high standards of corporate governance and investor confidence. In particular the professional advisers to entities - lawyers, accountants, and others - have significant responsibilities. By law directors are entitled, in certain circumstances, to rely on the advice of professionals. This is entirely appropriate, but places a burden on advisers in terms of their conduct and accountability. Ultimate responsibility under the law for good corporate governance lies with boards and directors.
Regulators and the regulatory environment also have a role in encouraging good corporate governance. The Commission takes this responsibility seriously and will pay close attention to the corporate governance of those entities for which we have jurisdiction.
Various accounting scandals overseas have increased the focus on auditors and audit performance. Internationally, confidence in auditors has been shaken.
New Zealand is unusual in that it does not have a body, independent of the audit profession, responsible for the oversight of auditors. There was not strong support for such a body from the consultation. However, the Commission considers that independent oversight of auditors would contribute to confidence in audit quality and in particular auditor independence.
This would also contribute positively to the integrity of our capital markets, particularly as they are perceived by international investors. It would bring New Zealand into harmony with other jurisdictions including Australia, the United Kingdom, and the United States.
The Commission will recommend that the Government take steps to achieve this.
In its consultation documents the Commission identified nine areas of corporate governance important to New Zealand. The public response endorsed these nine issues and accordingly a principle has been developed for each. Consequently this document is in nine sections, each with four parts.
The Appendix describes the public consultation process and provides a detailed analysis of the responses to our consultation.