It’s been over a decade since New Zealand’s corporate governance code was last updated; now the NZX is asking investors, issuers and other stakeholders for their thoughts on proposed changes.

Following a review of reporting requirements in late 2015, last week the New Zealand Stock Exchange (“NZX”) issued a draft version of an updated NZX Corporate Governance Best Practice Code (the “Code”; link goes to PDF) as part of a consultation exercise.

This will be the first significant update to the Code since 2003, and the NZX is making up for lost time by proposing new provisions and reporting requirements in several areas that have become increasingly important to investors over the past decade but are currently absent from the existing Code, such as:

  • Diversity, with a provision regarding disclosure of board diversity policy, operating on a comply or explain basis;
  • ESG reporting guidance, which may reflect either bespoke guidance based on the Sustainable Stock Exchange Initiative’s (“SSEI”) model guidance, or alternatively the Global Reporting Initiative’s (“GRI”) framework, as part of a broader recommendation relating to non-financial disclosure;
  • Remuneration reporting, including disclosure of a policy for director and senior executive remuneration, and more specific disclosures regarding the CEO’s remuneration arrangements, such as actual base salary, short- and long-term incentives, and relevant performance criteria.

In addition, changes to the structure of the Code itself are intended to provide alignment with New Zealand’s FMA Handbook, as well as the Australian Stock Exchange’s own corporate governance code, through the application of a tiered structure. At the top tier, eight principles set out overarching themes and concepts; the second tier comprises recommendations operating on a ‘comply or explain’ basis; and the third tier sets out explanatory commentary on how issuers can meet recommendations along with optional reporting guidance.

Perhaps unsurprisingly, potential changes to remuneration reporting and recommendations relating to board composition have already sparked debate. On pay, the NZX is balancing investors’ desire for transparency against both issuers’ reluctance to provide this information and a broader concern that requirements in other markets such as nearby Australia “may require too much detailed disclosure, which is reducing the benefit of disclosure.” Its proposed approach to squaring this circle is to recommend disclosure of specific details regarding the CEOs pay, but to limit disclosure regarding other executives to a broader overview of the remuneration policy.

On the topic of board composition, the NZX is asking whether boards, committees and directors should be subject to formal assessments; however it appears to be deferring to an upcoming review of New Zealand’s Listing Rules on whether to make any changes to the recommended proportion of independent directors, or just what constitutes an independent director. Similarly, the question of whether to recommend that issuers rotate their audit firms each decade was raised but will be considered as part of the Listing Rules review.

With respect to reporting on ESG-related issues, the NZX is requesting comments on whether the proposed approach of producing specific, voluntary guidance on ESG reporting, as suggested by the SSEI while also allowing issuers to the existing GRI reporting framework, is workable.

Reporting on specific guidance from SSEI could take a more standardized approach, requiring companies to report on specific issues regardless of their materiality to issuers. Reporting against a GRI standard, however, would allow issuers more flexibility in their reporting on material environmental and social issues that may be unique or have outsized importance to their respective companies. It would also not necessarily require issuers to expend resources to report on metrics or issues that have negligible impact on a company or its operations. Reporting in accordance with the GRI would also allow those companies already using that standard to continue to report using the indicators and would also allow ensure consistency and comparability to GRI disclosures from other markets. However, it should be noted that, while useful for investors, GRI reporting is designed in a manner to also be useful to stakeholders (e.g., NGOs, employees, local communities). SSEI reporting, however, appears to be more specifically targeted to an investor audience.

Interested parties are asked to respond by October 14, 2016, and the new Code is expected to be implemented in Q1 2017.