New Zealand Stock Exchange finalises new corporate governance regime

Brynn Gilbertson, Partner and James Gibson, Partner | Friday 15 August 2003

Introduction

After consultation with listed issuers and other interested parties, the New Zealand Stock Exchange (NZX) has released its new corporate governance regime.

This regime is in the form of a Corporate Governance Best Practice Code (the Code) and a number of governance-focussed amendments to the NZX Listing Rules.

The proposed amendments to the Listing Rules must now be sent to the Minister of Commerce for approval within 40 working days.

The NZX does not expect the Minister to have any objections to the proposed amendments to the Rules and they are likely to be adopted as currently drafted.

Accountability and transparency

The NZX sees the Code and the Listing Rule amendments as a measured response to the global movement towards greater corporate accountability and transparency.

NZX's stated philosophy was to create a regime that:

• gave the New Zealand markets international credibility;
• enhanced investor confidence; and
• brought New Zealand markets into line with other recognised markets.
  

The framework for the regime adopted by the NZX is a mix of prescriptive and disclosure-based rules.

In summary, the amendments to the Listing Rules require listed issuers to compose their Boards in a certain way and impose certain rules around the composition and operation of an issuer's Audit Committee.

The Code is a model for best practice, compliance with which is voluntary. However, where an issuer's practice departs materially from the Code, those departures must be disclosed in the issuer's annual report.

Unlike the ASX regime, the NZX rules do not require an issuer to go further and explain its rationale for departures from the Code.

On a conference call recently convened by the NZX to discuss the new regime, NZX staff indicated that whilst waivers from the new Listing Rules would be considered by the Market Surveillance Panel, they would not be readily granted.

Major changes

We have prepared a table that describes the requirements of the amended Listing Rules and the Code, but the most significant elements of the new regime are:

• an issuer's Board must have at least two Independent Directors, or where the Board comprises eight or more Directors, three or one third (rounded down) of the total number of directors must be Independent Directors;
  
  
• a Director will not be an Independent Director where:
  
  
  • he or she is associated with a party who has an interest in 5% or more of the issuer's shares; or
    
    
  • where a Director has a relationship with the issuer through which the Director derives 10% or more of his or her annual revenue from the issuer in its financial year;
    
    
• an issuer's Board must identify to shareholders those Directors that it considers to be independent at least twice in each financial year;
  
  
• an issuer must establish an Audit Committee which has certain responsibilities prescribed by the new rules, including ensuring that the external auditor or lead audit partner is changed every five years.
  

The finalised regime has been amended from earlier drafts distributed for comment. Some of the more significant amendments include:

• the NZX has relaxed criteria for Audit Committee qualification by providing that a member of the Audit Committee will be deemed to have adequate accounting or financial background if he or she has the experience and/or qualifications deemed satisfactory by the Board;
  
  
• the removal from the Code of the requirement for issuers to issue financial reports; and
  
  
• the requirement for Directors to have successfully completed an NZX-approved certification course has been dropped.
  

Consistent with the NZX's recognition that increased compliance can deter issuers from entering the New Zealand market, the new corporate governance regime will not apply to "debt-only" issuers, or to foreign issuers with "courtesy" listings.

In addition, the NZX is not proposing to require listed companies on the new New Zealand Alternative Market (NZAX) to comply with the Code and amended rules.

Advice and information

For further advice or information on any aspect of NZX listing or corporate governance, please contact Brynn Gilbertson, Garry Downs, James Gibson, David Flacks, Gavin MacDonald or Haydn Wong in Auckland, or Andrew Brown or Mark Freeman in Wellington.

Further information about the NZX is also available online at the exchange website, www.nzx.com.