NZX has now released its new Corporate Governance Code (New Code), which will replace the current Best Practice Code from 1 October 2017.

The New Code is more comprehensive than the Best Practice Code. It is designed to reflect international best practice and the principles of corporate governance set out in the Financial Market Authority's Corporate Governance Handbook.

The New Code is structured into eight key principles, with recommendations and commentary under each principle. At a practical level, compliance with the code is measured against the recommendations rather than the overarching principles.

The key themes coming out of the recommendations include a preference for NZX listed companies to establish a more comprehensive policy framework and a focus on transparency for shareholders.

Comply or Explain

The New Code is not compulsory, but listed companies are required to report against their compliance with each of the recommendations in their annual report, on their website or a combination of both.

Listed companies must explain what policies and practices they have in place in respect of each recommendation and inform investors where they can find up-to-date copies of any materials referred to in the explanation. If the company does not comply with the recommendation, it must explain why.

We recommend that listed companies include a section in their annual report disclosing compliance, or explaining non-compliance, with each of the recommendations of the New Code, as well as a section on the company website, which can be updated on an ongoing basis.

Policies and Procedures

The New Code recommends that NZX listed companies establish the following policies, procedures and frameworks:

• A code of ethics that establishes minimum standards of behaviour to which the listed company's directors and employees are expected to adhere.
• A financial product dealing policy that outlines expectations for financial product dealing by employees and directors, and protects against a breach of insider trading laws.
• Written charters setting out the role and responsibilities of the board, audit committee, remuneration committee and nomination committee.
• Procedures for the nomination and appointment of directors and procedures to regularly assess director, board, and committee performance.
• A diversity policy that includes measurable objectives for achieving diversity, and an annual assessment of progress against those objectives. The policy should address gender diversity as a minimum.
• Appropriate protocols to be followed if there is a takeover offer for securities of the company, including the option of establishing an independent takeover committee.
• A continuous disclosure policy that explains how the company complies with its continuous disclosure obligations.
• A remuneration policy for the remuneration of directors and officers, which outlines the relative weightings of remuneration components and relative performance criteria.
• A risk management and reporting framework, which outlines the processes in place to identify and manage risks.
• A framework for the company's relationship with its external auditors (including communications, enabling the statutory audit role, other services and monitoring by the audit committee).

We recommend that listed companies carry out a review of their governance documentation to identify gaps and any areas where existing policies or procedures should be updated.

Many listed companies will already have some of the policies and procedures recommended by the New Code in place as part of good corporate governance, or as part of their compliance with the Best Practice Code. However, the New Code contains recommendations and commentary that may necessitate an update of existing policies or the establishment of new policies or procedures.

For example, although the Best Practice Code requires a code of ethics, the New Code is more prescriptive. Likewise, many companies will  have adopted a risk management framework but existing frameworks should be reviewed in light of the New Code which emphasises regular reporting and the management of health and safety risks. Protocols to apply in a takeover situation may not have been previously formalised. Separate to the New Code, NZX has issued guidance notes on continuous disclosure and on gender diversity which will be relevant to continuous disclosure policies and diversity policies respectively.

Disclosure and Transparency

Disclosure and transparency is a key feature of the New Code. In addition to the requirement to report against each of the recommendations, the New Code recommends that:

• Key governance policies and documents are made available on the company's website.
• Information about each director (including experience, length or service, independence and ownership interests) is included in the annual report and on the company's website.
• The company's financial reporting considers material exposure to environmental, economic and social sustainability issues.
• There is full transparency when recommending director remuneration.
• CEO remuneration is disclosed in the annual report (including base salary, short and long term incentives and performance criteria).
• Management of health and safety risks is disclosed and the company regularly reports on performance.
• Internal audit functions are disclosed (including structure and role).
• A modern communication system is established to allow electronic communication with shareholders.

We recommend that listed companies review their current investor disclosure regime to ensure compliance with the New Code. For most listed companies, compliance with the New Code will mean new information is published on their website and included in their annual report.

Next Steps

NZX listed companies are required to report against the New Code for financial years ending after 1 October 2017, although NZX is encouraging companies to comply earlier.

Simpson Grierson's is well placed to assist listed companies review their existing corporate governance framework and ensure that it is up to the standards set out in the New Code and international best practice. Please get in touch with one of our experts if you would like us to help.