The NZX has released the final version of its updated corporate governance code, including recommendations for increased disclosure of executive remuneration.
For years, New Zealand companies have only needed to disclose Director pay on an individual basis. Executive pay has been reported only in aggregate within $10,000 remuneration bands – a company might say that one executive earned over $500,000, two executives between $500,000 and $490,000, etc. Shareholders might assume that the CEO is the highest paid employee in the organisation, but as remuneration experts would know, this is not always the case.
What constitutes disclosed pay in these bands is also not always uniform, with some companies reporting fixed remuneration and others disclosing total remuneration, with little information provided on how the values for this pay are calculated. The link between pay and performance is often not made clear and details on incentive schemes, if there are any, are scant.
The new additions to the NZ Corporate Governance Code will change this to a certain extent.
How does the NZ Corporate Governance Code work?
The Corporate Governance code uses a hierarchy of principles, recommendations and commentary. Principles are overarching headings, recommendations made in the code are to be adhered to on a comply or explain basis, while any suggestions in the commentary provide guidance towards recommendation implementation that can be voluntarily followed.
This means that if companies decide not to follow a recommendation, the listing rules mandate that they explain why not, but there are no consequences for ignoring advice in the commentary.
What’s new in the code for remuneration?
The code recommends that:
- The remuneration mix (relative weighting of remuneration components) should be disclosed for Directors and officers (executives). The companies would decide which employees fall under this term.
- The performance criteria for Directors’ and officers’ incentive pay should also be disclosed. Companies do not have to disclose the precise details of targets so long as sufficient information is provided to inform investors as to the type of performance hurdle that applies.
- The value of the CEO’s base pay, short term incentive and long term incentive should be disclosed individually as well as the performance hurdles on which their performance pay is based. In the commentary, the code notes that such disclosure should cover target amounts set for the year, short term incentive payments made in the year, long term incentive grants made in the year, and long term incentive grants that have vested in the year. For grants, the vesting term and the basis of the grants should be disclosed.
The code also includes commentary that states:
- Companies should ensure remuneration consultants report to the Board, and when referencing advice from consultants, should publish a summary of the consultant’s findings along with a declaration of independence from the consultant.
- Actual Director remuneration disclosure should include a breakdown of remuneration for committee roles and for fees and benefits received for other services provided to the issuer.
What will it mean in practical terms?
For companies that want to remain secretive, the new code will not force them to make additional disclosures. Like Australia’s Principles and Recommendations, compliance with the code only requires companies to note whether they have fulfilled recommendations and if not, disclose their reasons for failing to do so.
Yet, proxy advisors and investors are likely to apply pressure to companies that fail to comply to the code’s recommendations – mandatory or not, there will be increased disclosure among New Zealand companies, especially for larger organisations.
Unfortunately, companies that do follow recommendations will still not be as transparent as their Australian counterparts, as individual remuneration information will only be provided for Directors and the CEO. For executives, observers will still rely on band information and the new remuneration mix disclosures.
When is the code effective?
The Code takes effect from 1 October 2017 so that it must be reported against for reporting periods ending 31 December 2017 and beyond.
It’s possible that mandatory requirements will be introduced in the listing rules to support certain code recommendations. When releasing the new code, the NZX referenced an upcoming review of its listing rules. One element for consideration the minimum proportion of independent Directors required for listed companies. Whether remuneration disclosure will be under consideration for this review is uncertain at this point.
Why did the NZX update its remuneration disclosure recommendations?
When consulting on the code, the exchange stated that “the current requirements for remuneration reporting are minimal” and “puts NZX out of step with global standards, particularly when compared to the position in Australia where legislation in particular contains extensive requirements”. In its new version of the code, it stated that “investors rightly have a particular interest in director and executive remuneration. Transparency in these areas is essential to foster investor confidence.”
Why didn’t the NZX go further?
NZX received submissions stating that Australia’s detailed disclosure was too confusing, reducing its benefit. It stated that it was “keen to avoid a similar outcome” and therefore “sought to propose measured amendments seeking to balance the interests of investors for greater transparency with the needs of issuers to retain a level of confidentiality of potentially commercially sensitive information and ensuring a focus on the most useful information”.
What’s new in areas other than remuneration?
- Code of ethics: The code introduces a recommendation that companies create a code of ethics governing the behaviour of Directors and executives and discusses what should be in that code of ethics.
- Board Composition: The code recommends that Boards have a charter setting out the roles of the Board and management; provide information on Directors’ holdings, experience and tenure; create written agreements with each Director; develop and disclose a diversity policy; as well as adopt formal processes to appoint Directors and review Board performance.
- Disclosure: It recommends that the Board create a continuous disclosure policy and disclose it, as well as disclosing its code of ethics, Board charters and recommended policies. It also recommends that the company provides financial and non-financial disclosure, with information on exposure to environmental, economic and social sustainability risks.
- Risk: The code recommends that issuers have a risk management framework and report on this to the Board. It also makes specific recommendations around health and safety risks,
- Auditor: the external auditor should attend the issue’s Annual meeting to answer questions from shareholders and any internal audit functions should be disclosed.
- Shareholder rights: The Code recommends that the company have a website where investors can access information, including corporate governance information with AGM information to be published at least 28 days before the event. The code provides suggestions in the commentary of what kind of information should be on the website. The code also recommends that investors have the ability to communicate with the company, that shareholders have the right to vote on major decisions that might change the nature of the company, and that there be one vote per share for each owner of the company.