Focus on Governance

With the end of the calendar year fast approaching, this edition of the Governance Readout draws attention to a handful of topical matters as we head into 2024.

Governance focus continues from NZ Markets Disciplinary Tribunal

Director independence and audit committees

The NZX’s independent surveillance and enforcement arm, the NZ Markets Disciplinary Tribunal (NZMDT) has made three decisions recently in relation to the Listing Rules and governance code settings around director independence and the makeup of audit committees. These decisions resulted in fines ranging from $40,000 to $75,000 and public censure of the organisations involved.

In each case it was found that there was no material loss to investors from the breaches, and they were largely unintentional as opposed to orchestrated matters of non-compliance. These decisions reflect the importance the market regulator places on these governance settings.

The key issues considered by NZMDT were summarised at the NZX Issuer Forum in November as follows:

• Director independence – issuers must determine a director’s independence within 10 business days of appointment, announce via MAP if this changes and state in the annual report which directors are independent.
• Audit Committees – the Listing Rules have non-negotiable settings around numbers, independence and makeup, while the Governance Code has optional settings that must be disclosed against if not followed.

These decisions have highlighted the need for processes to operationalise compliance matters, regular monitoring and advanced planning against the regulatory settings.

Corporate Governance Statements now under regulatory review

The other development in a matter recently considered by the NZMDT was non-observance of the ‘comply or explain’ regime in the Governance Code. This regime has been in place for some years now, and while a light touch has been taken around surveillance and compliance in this space to date, the regulator has clearly signalled that it will look more closely at these disclosures if the circumstances require.

New NZX Corporate Governance Code

With the new Governance Code settings now in place, all companies with balance dates on or after 1 April 2023 will have to report against the updated 2023 Code in their next annual reports. Now is a good time to be performing the necessary checks and reporting to your board on where your company stands in terms of compliance. Doing this sooner rather than later will give you the time to implement any changes to policy, process, disclosure or structure that you feel are necessary in response to the more developed Code settings and guidance.

NZX Listing rule training modules

At its Issuer Forum in November, NZ RegCo revealed that it is developing training modules that listed company personnel can undertake to educate themselves about listing rule compliance. Each module will be forty minutes in duration and will qualify as CPD. These will cover a broad range of topics, from continuous disclosure to related party transactions and capital raising. We see this as a positive development and as such, Computershare will be participating in and supporting this initiative from the NZX.

Authorised representatives

The training regime will incorporate a requirement for all listed companies to have an ‘authorised representative’ as their primary contact, as well as a secondary contact. This is so that the NZX can contact the company at short notice to discuss regulatory and operational matters. These authorised representatives will have to undertake the listing rule training.

Transformation of the Company Secretarial role

These initiatives from NZX reflect a clear desire to protect the integrity of the market and ensure that listed companies have the properly qualified resources in place to support Listing Rule and Governance Code compliance.

While in Australia all companies are required by law to appoint a Company Secretary to take responsibility for these things, our Companies Act 1993 does not do this. What we are perhaps witnessing with the development of these new initiatives is recognition of the important part this role plays within listed companies, and a not-so-subtle push for them to get the right resources in place to manage compliance and governance.

Capital raise settings and ANREOs

Following its review and consultation on the capital raising settings, the NZX has published the following key points from those who contributed to the discussion:

• The importance of protecting existing shareholders’ property rights
• The need for boards to have offer structure flexibility
• The need for settings that are consistent with the ASX.

The outcome of the consultation is that:

• Secondary market capital raisings will need to include a liquidity event such as a shortfall bookbuild or rights trading as part of any renounceable offer structure;
• There will be an increase to the monetary limit for share purchase schemes from $15,000 to $50,000;
• Enhanced disclosure will be required at the time of offer, including shortfall allocation policies.

The consultation also looked closely at the settings around accelerated non renounceable rights issues (ANREOs). While there were conflicting views between institutional investors, lawyers and brokers, the outcome is that ANREO structures will be permitted, but with some enhanced shareholder protections:

• A dilution limit of 1:3
• The inclusion of a statement as part of the offer explaining:
• why the structure has been chosen
• why it is in the best interests of the issuer
• the impact of the structure on non-participating shareholders and,
• whether expert advice was obtained on the merits of the structure and if so, the identity of the adviser.

Remuneration reporting template

The NZX is also developing a remuneration reporting template as a voluntary tool to help issuers frame their disclosures in this area and aid comparability. Based on our experience with a range of listed entities we think this initiative has the potential to be a useful method that will help companies ensure they are disclosing what is expected.