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Corporate Governance in New Zealand

Principles and Guidelines

4.

Reporting and Disclosure

Principle

The board should demand integrity both in financial reporting and in the timeliness and balance of disclosures on entity affairs.

Guidelines

4.1

All boards should have a rigorous process for assuring directors of the quality and integrity of entity financial reports including their relevance, reliability, comparability, and timeliness.

4.2

Annual reports of all entities should, in addition to all information required by law, include sufficient meaningful information to enable investors and stakeholders to be well informed on the affairs of the entity.

4.3

All issuers should have an effective system of internal control for reliable financial reporting.

4.4

The chief executive, the chief financial officer (or equivalent officers), and at least one other director of publicly owned entities should certify in the published financial reports that these comply with generally accepted accounting standards and present a true and fair view of the financial affairs of the entity.

4.5

Each listed entity should have a clear and robust internal process for compliance with the continuous disclosure regime, which should include board examination of continuous disclosure issues at each board meeting.

4.6

Every entity should make its code of ethics, board committee charters and other standing documents important to corporate governance readily available to interested investors and stakeholders.

4.7

Boards of issuers should report annually to investors on how the entity is implementing the Principles and explain any significant departure from guidelines supporting each Principle.

Key findings from consultation

• Companies should report on their performance against governance principles.
• No obvious gaps were identified in the current disclosure requirements for listed companies.
• Unlisted companies with public shareholders should improve disclosure.
• Opinion was divided on the need for other unlisted companies to disclose more information than they do now.
• Listed companies should not be required to report quarterly.
• CEOs and CFOs should publicly sign off financial statements.
• Auditors, audit committees, and enforcement of reporting requirements are important safeguards.
• Reports should be easy to understand.

Securities Commission view

High standards of reporting and disclosure are essential for proper accountability between an entity and its investors and stakeholders. Accountability is a principal incentive for good corporate governance. Reporting and disclosure encompasses both financial reporting and reporting on other affairs of the entity, including corporate governance structures, processes, and actions.

The quality and integrity of financial reports are reflected in their relevance, reliability, and comparability, and in how understandable they are for users. Other disclosures must be balanced and timely. Legal and regulatory requirements, including the NZX Conduct Rules, establish baseline expectations for reporting and disclosure. Good corporate governance includes compliance with these requirements and a commitment to ensuring that investors, stakeholders, or the recipients of public sector reports are sufficiently informed to allow them to assess the entity and the board.

The board is directly responsible for the integrity of financial reports. This requires internal controls and processes to enable directors to satisfy themselves of the quality of financial reporting. The audit committee (see 3.) and independent auditors (see 7.) make a major contribution. These processes should include certification by the chief executive and the chief financial officer (or equivalent officers). These executives are principally accountable to directors on whom there is already well-established responsibility for financial reports. We see this accountability further strengthened, especially in publicly owned entities, by the CEO and CFO publicly demonstrating their responsibility by certifying the financial statements. While directors retain liability for the financial statements of an entity, they will to a degree rely on management assurances about the accuracy and completeness of financial reports. In view of this, an added public certification by the responsible executives will enhance investor confidence in the entity.

Reporting and disclosure requirements are of most significance for public sector entities and for issuers and listed entities, consistent with current law. However, other entities could adopt similar standards in the form and timeframe that best suits their legal form, types of business, stage of development, and also the range of users of their financial reports. We encourage all issuers to see listed entity reporting and disclosure as best practice in the New Zealand environment, to the extent applicable. All entities that have raised money from the public should report to investors on the entity's goals, strategies, position, and performance.

The continuous disclosure regime is a major contributor to higher standards of information disclosure in the listed issuer sector. The immediacy of continuous disclosure requires that boards of listed issuers have processes to raise awareness throughout the entity of the obligations of disclosure, and efficient channels to alert management of matters that may require disclosure. Compliance with continuous disclosure is a board responsibility, and the processes should ensure that continuous disclosure compliance is placed on the agenda of board meetings.

The principles-based approach to corporate governance relies on meaningful disclosure. Reporting should not be by "tick-in-the-box". It should involve boards saying how they have implemented each Principle, i.e., the actions they have taken that suit the legal form, business type and stage of development of the entity. Describing governance structures and behaviours in this way will enable investors and stakeholders to make an informed assessment of the governance of the entity. The disclosure process can also be used as a facilitation process to assist the board in its assessment of the entity's processes and internal control.

5.

Remuneration

Principle

The remuneration of directors and executives should be transparent, fair, and reasonable.

Guidelines

5.1

The board should have a clear policy for setting remuneration of executives (including executive directors) and non-executive directors at levels that are fair and reasonable in a competitive market for the skills, knowledge and experience required by the entity.

5.2

Publicly owned entities should disclose their remuneration policy in annual reports.

5.3

Executive (including executive director) remuneration should be clearly differentiated from non-executive director remuneration.

5.4

Executive (including executive director) remuneration packages should include an element that is dependent on entity and individual performance.

5.5

No non-executive director should receive a retirement payment unless eligibility for such payment has been agreed by shareholders and publicly disclosed during his or her term of board service.

Key findings from consultation

• Opinion was divided over whether all directors' remuneration should be linked to company performance.
• Linking remuneration to company performance risks directors taking a short- term rather than a strategic view.
• Fees paid to non-executive directors may be too low to attract and retain the right people.
• Opinion was divided over whether a portion of non-executive directors' remuneration should be in shares or options and whether they should be paid retirement benefits.
• CEO and senior management remuneration should be disclosed.
• Executive remuneration should not be subject to shareholder approval.

Securities Commission view

Adequate remuneration is necessary to attract, retain and motivate high quality directors and executives. Such remuneration, it is generally expected, will be reflected in enhanced entity performance. To some extent, remuneration can also be a means of sharing with directors and executives the financial rewards and risks of good or poor performance.

The issues in establishing remuneration are particularly complex and can only be viewed in the context of each entity. It is important that every board has policies and processes for setting remuneration and for remuneration reporting (including disclosures required under the Companies Act 1993).

Shareholders of a publicly owned company have a particular interest in seeing that the remuneration policy will attract the right directors, and that the level of remuneration is reasonable. To enable shareholders to assess this, the policy for determining remuneration must be disclosed, as well as the total remuneration and other benefits paid to directors.

Executive and non-executive directors have different roles and different incentives. Drawing a clear distinction between the remuneration packages of executive directors and non-executive directors allows entities the flexibility to properly address the circumstances of both.

If a part of executive directors' remuneration is related to entity performance over time, their efforts are more likely to be focused on making a contribution to future investor returns rather than only on short term gains. Such remuneration may include shares or options.

Non-executive directors' remuneration is usually by way of fees. Again it is important for accountability of publicly owned entities that all benefits received are disclosed to shareholders. It is consistent with this transparency that non-executive directors should not receive retirement payments except where eligibility for such payments has been agreed and disclosed during the term of service on the board, and in the case of publicly owned entities, where shareholders have been asked to approve these payments.

Some entities, particularly those with larger boards, may benefit from appointing a remuneration committee to make recommendations on remuneration for executive directors and other executives. Where shares or options are part of performance-related remuneration, the committee can recommend to the board (or have delegated responsibility for) an appropriate approach to valuation and disclosure

6.

Risk Management

Principle

The board should regularly verify that the entity has appropriate processes that identify and manage potential and relevant risks.

Guidelines

6.1

The board should require the entity to operate rigorous processes for risk management and internal control.

6.2

The board should receive regular reports on the operation of risk management and internal control processes.

6.3

Boards of issuers should report annually to investors and stakeholders on risk identification and management and on relevant internal controls.

Key findings from consultation

• Entities should have risk management policies.
• Financial, market, operational, and environmental risks, delegations, and succession planning should be included in risk management policies.
• Opinion was divided on whether risk management policies should be published.
• Risk management policies and procedures should be monitored and regularly reviewed.
• Focus on risk should not stifle business.

Securities Commission view

Risk is an essential feature of business. Each entity is faced with a range of risks that it needs to identify and manage (or avoid). Accordingly, risk management is a critical area of responsibility for the board. Boards can only be effective if they know of, and can properly assess, the nature and magnitude of risks faced by the entity. Effective risk management can enable an entity to take the risks appropriate to its business.

Processes to identify, monitor and manage risks are needed so that the board and managers can be properly informed and can implement systems of internal control that are responsive to the identified risks. These processes will usually operate alongside the internal control structures of the entity. The size and circumstances of the entity and the particular risks it faces will help determine the best risk management processes for the entity. Effective processes will accommodate the types of risks that the entity is likely to face, including legal compliance, financial, operational, technological, and environmental risks. An internal audit function can assist effective risk management and internal control in entities that face significant financial, operating, and compliance risks.

For issuers, disclosure of the nature and magnitude of material risks and how the board intends to manage these will be of significant benefit to investors, who need this information in order to make informed investment decisions. For other entities, disclosure of risk management policies may be useful where these affect specific stakeholders.