Corporate Advisory

31 Mar 2009

Corporate Governance: How Do You Measure Up?

The Securities Commission (Commission) has announced it is reviewing corporate governance reporting by issuers. As part of the Commission's on-going financial reporting surveillance programme, it will select issuers and review corporate governance disclosures made by those issuers against its nine principles of corporate governance (Principles), published in 2004.

The Commission's review was sparked by a report recently prepared by the Registrar of Companies Office for Parliament (Report), which was highly critical of corporate governance standards in certain sections of the market. It singled out poor corporate governance as a key factor contributing to the collapse of the finance company industry, and exposed details on business models of various finance companies between 2006 and 2008.

The Report pointed the finger at directors, accusing them of lacking "the breadth of experience and skills required to oversee the scale, complexity and characteristics of financing operations". The Report went on to say that "too often directors were not adequately informed, misled or failed to take sufficient interests in the affairs of the company".

So What?

What changes for issuers? In short - not a lot. There are no additional legal obligations or requirements placed on issuers as a result of the Commission's  review and, even if issuers are in breach, enforcement is limited. The Commission will provide helpful feedback to the market on those in breach and, in doing so, draw issuers' attention to the importance of corporate governance and proper disclosures (ie. reporting on how an issuer has achieved compliance rather than a "tick the box" approach).

The key message of the Report, and the Commission's review, is that good corporate governance equals good corporate performance. Lack of governance can result in failed businesses and, consequently, lack of confidence in the market. Issuers should use the review as an opportunity either to:

• adopt a corporate governance regime that complies with the Principles; or
• review their current corporate governance regime and recent corporate governance disclosures and "beef up" areas of their regime and future disclosures to ensure compliance with the Principles. 

Status Quo

New Zealand corporate governance guidance is principally embodied within the NZSX Listing Rules (Listing Rules) and the Principles. Appendix 16 to the Listing Rules comprises a Best Practice Code which sets the regulatory benchmark against which listed issuers corporate governance is to be maintained and reported against. Separately, the Principles and associated guidelines and policies are published by the Commission. The Principles support existing law and comprise benchmark corporate governance standards against which listed and non-listed entities' corporate governance regimes are prepared. The Principles are not contractually or legally binding on entities nor do they impose a dual reporting regime for listed issuers.

Listed issuers are likely to be complying already with the points covered by the Principles, as these entities are held to high standards of corporate governance by virtue of their listing, requiring them to adopt certain practices and report on those practices.

Commission's Assessment

As part of its review, the Commission will assess the quality and level of annual report and website disclosures of selected issuers against the Principles, ie:

• Directors should observe and foster higher ethical standards.
• There should be a balance of independence, skills, knowledge, experience, and perspectives among directors so that the board works effectively.
• The board should use committees where this would enhance its effectiveness in key areas while retaining board responsibility.
• The board should demand integrity both in financial reporting and in the timeliness and balance of disclosures on entity affairs.
• The remuneration of directors and executives should be transparent, fair and reasonable.
• The board should regularly verify that the entity has appropriate processes that identify and manage potential and relevant risk.
• The board should ensure the quality and independence of the external audit process.
• The board should foster constructive relationships with shareholders that encourage them to engage with the entity.
• The board should respect the interests of the stakeholder within the context of the entity's ownership type and its fundamental purpose.

Compliance

Directors of issuers can take practical steps to ensure compliance with the Principles, specifically by:

• making accurate disclosures;
• creating audit and remuneration committees;
• establishing adequate internal controls and risk modelling;
• conducting proper and accurate valuations (rather than aspirational valuations);
• staying fully informed and aware to any warning signs flagging financial crisis; and
• complying with accounting standards.

Further information on the Principles can be found in the corporate governance handbook.

Conclusion

Although compliance is important, good corporate governance does not necessarily guarantee business failure will not occur and should not be placed on a corporate pedestal resulting in directors becoming completely risk adverse. It is important for directors to strike a balance between continuing to work towards a market that encourages risk-taking and capital raising, while providing adequate disclosure and greater transparency.

For further information on the Principles and the Commission's review, please contact us.

Authors

Kevin Jaffe

Partner - Corporate & Commercial

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Shelley Cave

Partner - Corporate & Commercial

DDI: +64 9 977 5260

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Peter Hinton

Partner - Corporate & Commercial

DDI: +64 9 977 5056

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Don Holborow

Partner - Corporate & Commercial

DDI: +64 4 924 3423

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Michael Pollard

Partner - Corporate & Commercial

DDI: +64 9 977 5432

Mobile: +64 21 400 852

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Alex Campbell

Senior Associate - Corporate & Commercial

DDI: +64 9 977 5177

Mobile: +64 21 918 311

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