NZX has completed the second and final stage of the review into its policy settings relating to director independence, as contained in the NZX Corporate Governance Code (the Code) and NZX Listing Rules (Listing Rules).
Key changes to the Code and Listing Rules include:
- Audit Committee composition: It is now a Code requirement that at least one member of the Audit Committee has an adequate financial or accounting background and is independent. Previously, the independence and financial or accounting expertise requirements could be met by different directors.
- Code factors for independence: The commentary on the range of factors relevant to assessing director independence has been updated (Code Factors). In particular, the Code Factor which considered whether a director is deriving a substantial portion of their annual revenue from the issuer has been clarified to include director fees and distributions paid by the issuer. This is a surprising addition, given we would have thought the factor was primarily aimed at revenue derived from specific relationships with the issuer of which the market would not otherwise be informed (eg consulting fees).
- Disclosure: The updated Listing Rules now require issuers to explain not only that a director is independent, but also, if applicable, identify the basis on which a Code Factor was "triggered" and why the board has nonetheless considered that the application of that Code Factor does not cause the director to have a "Disqualifying Relationship". This increased disclosure requirement will apply to notices of meeting and annual reports, as well as to market disclosures on appointment of a director or a change in their status. This had previously been a Code recommendation (effective since 2023) rather than a Listing Rules requirement, so issuers have in practice already been providing this disclosure.
- Clarification on residency: The Listing Rules currently require that at least two directors are ordinarily resident in New Zealand. Further guidance has been provided as to what constitutes 'ordinarily resident', with relevant factors including the amount of time a director spends in New Zealand, their connection to New Zealand, professional ties to New Zealand, and the manner of the director's living in New Zealand.
Russell McVeagh is pleased to see some of our consultation suggestions have been incorporated into the final form, which will make the obligations on listed issuers clearer. However, we remain concerned with several changes which do not reflect our fundamental view that the board of an issuer is best placed to assess a director's independence and they should be left with the ability to discuss independence candidly. We are particularly concerned with the increased disclosure requirements relating to such a determination and query whether the changes will, in practice, result in more meaningful disclosure for shareholders.
The amendments to the Listing Rules and Code (available here), are subject to approval by the FMA. NZX will provide at least one month's notice before they come in effect.