New Zealand Corporate Governance – Trends and Insights
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New Zealand Corporate Governance TRENDS AND INSIGHTS April 2019 Contents 2019 trends at a glance ....................................................................................................... 1 Shareholder primacy? ........................................................................................................ 2 Diversity reporting .............................................................................................................. 3 The ABC of governance – Attitude drives Behaviour drives Culture ................... 4 Do KAMs matter? ................................................................................................................. 6 Board composition – the top 75 ...................................................................................... 8 Iwi and Māori corporate governance .............................................................................10 We will fight them on the pages ....................................................................................12 Corporate governance codes ...........................................................................................13 Board and committee meetings .....................................................................................14 Shareholder engagement – 2018 research ..................................................................16 Recent reporting against NZX Code .............................................................................18 Board remuneration ...........................................................................................................19 How good is your D&O insurance? .................................................................................21 Chapman Tripp’s Corporate Governance team .........................................................22 Chapman Tripp maintains a data series, based on a detailed analysis of recent annual report disclosures from the top 75 listed issuers by market capitalisation (the “top 75”), with the most recent analysis as at 31 March 2019. Large Law Firm of the Year NZ Law Awards 2018 Deal Team of the Year (>100 lawyers) NZ Law Awards 2018 NZ Law Firm of the Year Chambers Asia Pacific Awards 2018 Most Innovative National Law Firm (NZ) IFLR Asia Awards 2018 2019 trends at a glance We begin this year’s New Zealand Corporate Governance Trends and Insights publication by asking whether the “shareholder primacy” model, which has prevailed in New Zealand and in like jurisdictions for decades, may now be under serious challenge. Two recent developments which support this view are: • a significant expansion in the UK Companies Act of the matters to which directors must have regard in their decision-making, and • the speech by Financial Markets Authority (FMA) CEO Rob Everett suggesting that the “Milton Friedman model”, where the responsibilities of a listed company board were primarily aimed at the returns to shareholders, is broken and was never valid or sustainable in the first place. Several of the currents we think will shape 2019 reflect a widening of the expectations of, and on, directors. But as of now, the strict legal obligation is still relatively narrow – to act “in what they believe is the best interests of the company” which “will often, but not necessarily, be what is in the best interests of the existing shareholders”. Key governance trends we expect to occupy boardrooms this year include: A continuing strong focus on culture from Increased importance for directors the ripple effects of, and the New Zealand of good Director and Officer (D&O) Government’s legislative response to, insurance cover, and of boards the Hayne Royal Commission and its New being able to rely on manageable Zealand offspring – the FMA/Reserve Bank information flows, including in of New Zealand (RBNZ) reviews into the response to slightly more active finance and insurance sectors litigation funders Closer scrutiny of directors from Continued development of an iwi strand shareholders, stakeholders and regulators in Aotearoa’s governance culture More comprehensive disclosure requirements, arising from the new New Zealand Stock Exchange (NZX) rules and an increasing shareholder interest in sustainability practices HOME 1 Shareholder primacy? Is the “shareholder primacy” model in the crosshairs? • the impact of the company’s operations on the community and the environment For many years, the orthodox approach to directors’ obligations has been founded on the premise that • the desirability of the company maintaining the job of the board is to maximise the wealth of all a reputation for high standards of business shareholders as a class and that the “best interests conduct, and of the company” is generally “whatever will create the • the need to act fairly as between members. most value for shareholders”. In our view, this is an important shift – which will But orthodoxy changes over time1, and is never create work for the legal profession by opening up entirely consistent. the opportunities for legal challenge against board decisions, but will throw sand into the machinery of • Although the conventional view in Commonwealth commercial activity. jurisdictions is that directors may not issue shares to thwart a control transaction, some cases have There has always been a degree of uncertainty and permitted it – and “poison pills” are a relatively inconsistency as to the extent to which directors may accepted feature of the US takeovers landscape. have regard to factors beyond shareholder value. • The New Zealand Companies Act requires But to require that they must have regard to these directors to act in what they believe to be the matters is a different thing altogether, for reasons best interests of “the company” – and, in places, more significant than the observation that it is likely expressly distinguishes between “the company” to result in increased legal costs. and “all existing shareholders”. One does not need to challenge the perception that • Canadian jurisprudence refers to directors’ “shareholder primacy” gives companies and directors “tripartite fiduciary duty”2, encapsulating the duty too much latitude to act in socially harmful ways to act in the “best interests of the corporation, to question whether the UK approach is the best viewed as a good corporate citizen”. way forward. The amendments last year to the UK Companies Act What is clear, though, is that it is likely a sign of things present a more significant challenge to the status quo. to come. For a local example, we need go no further They require directors to act in what they consider than the recent speech by Rob Everett, FMA CEO. “most likely to promote the success of the company for the benefit of its members (i.e. shareholders) as [T]he Milton Friedman model, where the a whole”, and in doing so have regard (among other responsibilities of a listed company board are matters) to: primarily aimed at returns for shareholders... the competitive dynamics of the “market” itself being • the long-term consequences of any decision able to weed out those who do harm, is broken. • the interests of employees Actually, it’s not broken, because it was never a valid or sustainable model in the first place. • the need to foster the company’s business relationships with suppliers, customers and others 1 Readers of Robert Teitelman’s excellent “Bloodsport” will be familiar with the transition from “managerialism” to shareholder primacy in the US which accompanied (and spurred) the rise of hostile takeovers. 2 This tripartite duty comprises (i) an overarching duty to the corporation, which contains (ii) a duty to protect shareholder interests from harm and (iii) a procedural duty of “fair treatment” to relevant stakeholder interests. Corporate Governance in New Zealand TRENDS AND INSIGHTS April 2019 HOME 2 Shareholder primacy? (continued) Across the globe, people are asking themselves – Social licence is a phrase that is becoming over- what purposes do companies serve, what are the used, but I believe that most market participants duties of their boards, and who are those owed to... now accept that all corporate structures have responsibilities to a broader set of stakeholders One flaw in the principle of shareholder primacy is than their shareholders... that the shareholder is often no longer the person or entity at the biggest risk from the conduct of the Boards have to balance serving the shareholders company. Reductions in profit or even bankruptcy by doing the right thing. And as Hayne pointed out at any particular company are not existential in the Australian Royal Commission, that is a far threats to global fund managers or other higher standard than complying with the law, or institutional investors running huge, diversified doing stuff that may not be in the spirit of the law, portfolios. Employees have much more at risk. or does not “affirmatively” and provably breach it. [S]uppliers likewise often have more at risk I think the tide has turned in terms of what the than shareholders especially when they public and the community at large expects from its become, whether they like it or not, creditors corporate leaders. of the company. When challenges to governance orthodoxy come from the Chief Executive of the FMA and UK lawmakers, it starts to feel as if change is in the wind. Diversity reporting Ten of the top 75 board chairs, Director gender by NZX market capitalisation ranking or 13%, were women, as were four CEOs (6%) and ten CFOs (15%). In a notable first, Spark will have both a female