Changes to NZX Corporate Governance Code and ESG Guidance Note released

Following a thorough consultation process which began at the end of 2021, New Zealand’s Exchange (NZX) published its final updates to the NZX Corporate Governance Code and the ESG Guidance Note (Guidance Note) in December 2022. Following approval by the Financial Markets Authority, directors of listed issuers are now expected to ensure that the updated standards set by the Code and the Guidance Note are being met.

Rather than itemising each and every change in the Code and the Guidance Note, we focus on those that we regard to be material, and what they might mean from a practical sense for NZX-listed issuers and their directors.

At a glance

NZX ran a thorough consultation process for updating the Code and the ESG Guidance Note.

With respect to the Code, NZX remains of the view that an issuer’s board is best placed to determine its own corporate governance settings and processes. The Code continues to be a set of recommendations for issuers to adopt and adhere to on a voluntary basis, under the existing ‘comply or explain’ framework.

The upshot of the recent Code revisions are that directors are expected to:

• Be held more accountable to investors – for example, while determining a director’s independence, setting their remuneration framework and exercising their duties as directors.
• Place more focus on ESG factors and reporting, and be proactive in making their reporting useful and accessible.
• Stay up to date and continue educating themselves on important corporate governance considerations, including ESG.

The Guidance Note largely complements the changes to the ‘Reporting and disclosure’ section of the Code, as described below.

NZX Corporate Governance Code

We have categorised the key changes to the Code, in terms of the eight principles that continue to underline it. The most significant changes relate to (1) determination of director independence, (2) ESG reporting and disclosure, and (3) disclosure of director remuneration arrangements:

1. Ethical standards

• Issuers to familiarise themselves with their legal obligations in relation to protected disclosures, as they consider the appropriateness of adopting formal whistleblowing procedures.
• Regular staff training on the issuer’s code of ethics, and disclosure of the timing of such training.

2. Board composition and performance

• Disclosure of information regarding attendance at board and committee meetings.
• Disclosure of how the board assessed each director’s independence (including an updated set of non-exhaustive factors that may cause a board to determine that a director is not independent).
• Consideration of a director’s tenure in making the independence determination, and succession planning arrangements.
• Larger issuers to have a target for achieving better board gender diversity, and to consider providing gender pay gap information.
• Adoption of diversity policies that consider factors beyond gender.

3. Board committees

• Only non-executive directors to be on remuneration committees (or where that cannot be achieved, implementing robust conflict management arrangements).
• Identification and disclosure of the composition of the issuer’s takeover committee and confirmation of their independence at the beginning of the takeover process.

4. Reporting and disclosure

• Greater emphasis on ESG reporting.
• Disclosure of ESG factors and practices, potentially at more regular intervals than annually, which could involve preparation of a standalone report.
• Disclosure of the process followed to by issuers ensure better non-financial reporting.

5. Remuneration

• Greater robustness around director remuneration, and implementation of a remuneration policy for directors.
• Components of director remuneration to be disclosed, and non-executive directors are not expected to receive performance-based remuneration (because that may inappropriately influence their decision-making) – although equity-based remuneration is generally acceptable.
• Disclosures relating to any independent remuneration reports used in informing director remuneration decisions.
• Disclosures relating to executive remuneration arrangements and performance hurdles (although commercially sensitive targets do not require disclosure).

6. Risk management

Inclusion of a summary of the issuer’s risk management framework in its annual report.

7. Auditors

Clarification of the importance of internal audit functions to enable evaluation of governance processes.

8. Shareholder rights and relations

Facilitating better shareholder engagement and participation, such as by holding ‘hybrid’ meetings.

ESG Guidance Note

The Guidance Note is designed to assist issuers with their ESG reporting under the Code. It does not impose obligations over and above those required of issuers under the NZX Listing Rules, the Code or legislation.

The Guidance Note recognises that a definitive list of ESG issues does not exist, as it is a fast-evolving topic (with climate-related disclosure frameworks being implemented nationally and internationally). However, it is clear that directors are expected to be able to explain the material ESG risks faced by their business, and how they can identify, monitor and manage those risks – in addition to being able to:

• Explain the relevance of ESG factors to their business models and strategy.
• Explain how ESG issues may affect their business.
• Explain how they intend to access new opportunities and revenue streams generated by environmentally and socially beneficial products and services.
• Identify whether any parts of their business can deliver environmental solutions and support the transition to a low carbon economy.
• Have access to accurate and timely data, which is comparable to global standards.
• Recognise that ESG reporting is the basis for dialogue with investors and other key stakeholders.

It is clear that ESG considerations are becoming an increasingly important consideration for the investment ecosystem, and issuers are expected to report against ESG matters in a meaningful and substantiable way. Directors also need to be aware that New Zealand’s mandatory climate-related disclosure regime is now in force.

Our thoughts

We welcome the changes under the Code and the Guidance Note. We do not consider that the amendments will be hugely disruptive to the way corporate governance is practised in New Zealand – and are aware that those issuers with a ‘best practice’ approach to governance are already well ahead of the curve, in responding to the standards set by the Code and the Guidance Note. Directors of those issuers tend to be familiar with their legal duties, and have been fine-tuning their policies and practices over the years to meet the challenges posed by legal and societal changes that impact on their roles.

It is obvious that ESG factors and reporting standards are here to stay, and will continue to evolve quickly. We very much doubt that ESG this will be the last significant ‘disruptor’ to the way corporate governance is expected to be practised – and other considerations may emerge over time.

For now, we recommend that directors focus on the items that they have clear visibility of, and can control. They should expect increased levels of scrutiny from the investment community on how issuers are governed in a modern context. They need to be “live” to the risks faced by their businesses, enhance how they are identifying, assessing and managing those risks, and consider how those processes are embedded into their overall risk management processes. Directors must remain open to change – and proactively look for ways to better understand what is expected of them, and respond to those expectations.

Start a conversation

If you would like a briefing on any aspect of this article, or have any questions, please contact Wook Jin Lee or Keegan Toft.

This article was co-authored by Lucy Tustin, a Graduate in our Corporate and Commercial team.