Questionnaire Regarding Recent Developments and Trends in the Standards Applicable to Listed Companies. New Zealand Answers

Transcription

1 Questionnaire Regarding Recent Developments and Trends in the Standards Applicable to Listed Companies New Zealand Answers By Jonathan Ross and Andrew Abernethy of Bell Gully Listed companies in New Zealand are governed by the Listing Rules of the New Zealand Exchange Limited (NZX) (the Listing Rules). The NZX has the power to enforce the Listing Rules. The Listing Rules contain certain mandatory corporate governance-related rules that deal with, among other things, board composition and audit committees. Appended to the Listing Rules is the Corporate Governance Best Practice Code (the NZX Code) which sets out certain nonmandatory corporate governance principles against which listed companies are required to report. The Securities Commission released its Corporate Governance in New Zealand: Principles and Guidelines in February 2004 (Securities Commission Principles). The Securities Commission Principles contain nine principles of corporate governance against which the Securities Commission encourages listed companies (and some other entities) to report. The Institute of Directors in New Zealand Inc. (IOD) has published a Code of Proper Practice for Directors (IOD Code) with the stated aim of providing guidance to directors. The IOD Code is binding on all persons who are members of the IOD. A significant number of directors of listed companies in New Zealand are members of IOD. Listed companies are subject to generally applicable companies and securities laws in New Zealand. Principal among these are the Companies Act 1993 (Companies Act), the Securities Act 1978 (Securities Act), the Securities Markets Act 1988 (Securities Markets Act) and the Financial Reporting Act 1993 (Financial Reporting Act). Accountants in New Zealand are subject to self-regulation by the Institute of Chartered Accountants (ICANZ). ICANZ has recently promulgated a revised Code of Ethics Independence in Assurance Engagements (the Auditor s Code). The Auditor s Code is based on the International Foundation of Accountants Code of Ethics, Section 8, Independence. Copies of the NZX Code and the Securities Commission Principles are appended to this questionnaire _5

2 EXHIBIT A Questionnaire Regarding Recent Developments and Trends in the Standards Applicable to Listed Companies Questions 1 Answers Is the standard a 1. Board 1.1. Are there any practices, standards or requirements regarding board independence? If so, what proportion of the board is required to be or has conventionally been independent? Yes. The Listing Rules require that the board of directors of a listed company include a minimum of two independent directors or, if there are eight or more directors, three directors or one-third of the board (rounded down to the nearest whole number of directors), whichever is greater. Requirement. Listing Rules amended on 29 October 2003; compliance is required by the later of 29 October 2004 or 12 months from the conclusion of the company s 2003 annual meeting All questions relate to standards applicable only to domestic listed companies. The questions are not meant to deal with the situation of foreign companies listed in a country. Where the standard is only a practice (not mandatory under any existing or proposed laws, rules or regulations), please provide, where possible, an estimate of how widespread the practice is. The objective is to determine whether the applicable laws, rules or regulations have changed in their text or in their application in response to the fall of the equity markets in circa If the applicable laws, rules and/or regulations were in place prior to the market fall, please say so _5

3 The Securities Commission Principles state that every issuer s board should have an appropriate balance of executive and non-executive directors and should include directors who meet formal criteria for independent directors. The Securities Commission Principles also recommend that boards of publicly owned entities comprise: a majority of non-executive directors; and a minimum of one third of independent directors Guideline. February The IOD Code requires the board to ensure that independent views of board members are given full and proper consideration and weight. It also provides that there should be a majority of non-executive directors on the board. Guideline. Pre

4 1.2. How do the principles of board independence work? The Listing Rules require the board of directors to identify which directors it has determined, in its view, to be independent directors. This determination must be made, and published, in the company s annual report, and within 10 days of the election or appointment of directors. (A copy of Listing Rules 3.3.1A to 3.3.1C is attached.) Requirement. Listing Rules amended on 29 October 2003; compliance required by the later of 29 October 2004 or 12 months from the conclusion of the company s 2003 annual meeting What types of relationships would preclude a member of the board from being considered independent (i.e., company s investment or commercial banker, shareholder, major client, etc.)? 4 The Listing Rules provide that an executive of the company is not independent. In addition, no person who has any direct or indirect interest or relationship that could reasonably influence, in a material way, the director s decisions in relation to the company is Requirement. Listing Rules amended on 29 October 2003; compliance required by the later of 29 October 2004 or 12 months from the conclusion of the company s 2003 annual meeting. 4 Note: Board independence standards seem to vary in detail but not in principle. They have also been subject to extensive comparative commentary in many countries, especially the European Union, the U.K. and the U.S. We suggest the technique used in our draft U.S. answers for initial responses in this area, i.e. a very general discussion with attached standards. 4

5 independent. Directors in the following relationships are not independent: the director has, or is associated with a party who has, an interest in 5% or more of the company s shares; the director or an associated person of the director has a relationship (other than in his or her capacity as director of the company) with the company and, by virtue of that relationship, derives a substantial portion of his or her annual revenue (generally considered to be 10% or more of that person s income) from the company in its financial year. Please note that this is a very general summary. (A copy of Rule is attached (see the definitions of independent director and disqualifying relationship.)) 5

6 1.4. Is there a requirement that independent directors meet without the participation of management or interested directors? No Are there rules concerning director conflicts of interest? If so, do such rules provide for a duty of the interested director to abstain from participating in meetings or voting? Yes. The Listing Rules provide that (except in limited circumstances) a director may not vote in respect of any matter in which that director is interested, nor may the director be counted in the quorum for the purposes of considering that matter. Requirement. Pre The Companies Act 1993 (the Companies Act ) contains provisions relating to director conflicts of interest. A director that is interested in a transaction of the company must disclose that fact in the company s interests register and to the board (except where the transaction is Requirement. Pre

7 between the director and the company and it is entered into by the company in the ordinary course of its business and on usual terms and conditions). The IOD Code provides that, in addition to strict adherence to procedures provided by law and the company's constitution, a director who has a continuing conflict of interest of a material nature should consider resignation as a director and should also consider the effects of resignation on the remaining members of the board and on shareholders. Guideline. Pre The Securities Commission Principles provide that boards should adopt a written code of ethics setting out explicit expectations and procedures for ethical decision making and personal behaviour in respect of, among other things, conflicts of interest. Guideline. February

8 1.6. Are there specific requirements or practices with respect to the nomination and compensation of members of the board (i.e., decisions to be made by special compensation or nomination committees, maximum compensation, limits on stock options, etc.)? Yes. The NZX Code recommends the establishment of nomination and remuneration committees (unless the company is constrained by its size). The NZX Code suggests that formal and transparent methods be adopted to deal with nominations and remuneration. The NZX Code also suggests that a majority of the nomination committee should be independent directors. The NZX Code also encourages directors to: take a portion of their remuneration under a performance-based equity security compensation plan (which should not vest until at least two years after the grant of plan entitlements); and invest a portion of their cash directors remuneration in purchasing the company s equity securities. A guideline against which reporting is required by the Listing Rules. The Listing Rules require a statement in the company's annual report on whether and, if so, how the corporate governance policies, practices and processes adopted or followed by the company materially differ from the Code (or a clear reference to where such statement may be found on the company's website). The NZX Code was introduced in October 2003 and compliance with the mandatory reporting requirements is required no later than the later of 29 October 2004 or 12 months from the conclusion of the company s 2003 annual meeting. 8

9 The Securities Commission Principles state that executive remuneration should be clearly differentiated from nonexecutive remuneration and should include an element that is dependent on entity and individual performance. No non-executive director should receive a retirement payment unless agreed and publicly disclosed during the term of service of that director. Guideline. February Is a two-tier board required or permitted? If permitted, is one frequently used? What is the division of functions between the two boards? The Companies Act recognises only one management body the board of directors. A two-tier board is unknown as a concept in NZ Is there any requirement or practice with respect to the separation of the roles of chairman of the board and chief Yes. The NZX Code provides that a director should not simultaneously hold the positions of chairman of the board and chief executive officer. A guideline against which reporting is required. Refer to the answer to

10 executive officer? The Securities Commission Principles state that balance in the relationship between management and board is facilitated if the roles of chairperson and Chief Executive Officer (or equivalent) are separated and the chairperson is an independent director. Only in exceptional circumstances should the chief executive become the chairperson. Guideline. February The IOD Code provides that, as a general rule, the roles of chairman and managing director or chief executive officer should be kept separate and not held by one person at the same time. Guideline. Pre Are employee or trade union representatives required to sit on the board? No. Union representation or other employee representation on the board is neither required nor customary. Widespread practice of avoiding non-executive employee board representation. Pre

11 1.10. Are any specific procedures required to ensure that financial and other information is provided to the board by management? 5 Yes. The Listing Rules impose on the audit committee the responsibility for: ensuring that processes are in place and monitoring those processes so that the board is properly and regularly informed and updated on corporate financial matters; and reviewing the financial reports and advising all directors whether they comply with appropriate laws and regulations. Requirement. Listing Rules amended on 29 October 2003; compliance is required by the later of 29 October 2004 or 12 months from the conclusion of the company s 2003 annual meeting. 5 Please specify whether such procedures place the onus on management to keep the board informed, or whether board members are required to request information (and if so, whether management is required to comply with such requests). 11

12 The NZX Code provides that information of sufficient content, quality and timeliness, as the board considers necessary to enable it to discharge its duties effectively, should be provided to the board by management. Guideline. Refer to the answer to 1.6. The IOD Code provides that the board must ensure that appropriate reporting systems are in place and maintained to provide accurate and timely information to the board and that adequate systems of control are in place. Guideline. Pre The Securities Commission Principles provide that the chief executive, the chief financial officer (or equivalent officers) and at least one other director should certify in the published financial reports that that these comply with generally accepted accounting standards and present Guideline. February

13 a fair view of the financial affairs of the entity. This is designed to generate higher quality information for the board. The Companies Act imposes general duties on all directors to exercise due care, diligence and skill in the performance of directors duties. Requirement. Pre Audits, Auditors and Audit Committees 2.1. Is there a requirement that audit firms rotate? Is there a requirement that audit partners rotate? The Listing Rules impose on the audit committee the responsibility for ensuring that the external auditor or lead audit partner is changed every five years. Requirement. Listing Rules amended on 29 October 2003; compliance is required by the later of 29 October 2004 or 12 months from the conclusion of the company s 2003 annual meeting. 13

14 The Securities Commission Principles state that no issuer s audit should be led by the same audit partner for more than 5 consecutive years. Guideline. February Is there a requirement that accounts be audited by more than one audit firm? No. There is no practice of using two auditors Are there standards or requirements on auditor independence? The NZX Code provides that an audit committee should address issues of auditor independence, including by establishing: a formal and transparent procedure for sustaining communication with the company s independent and internal auditors; and a formal and transparent framework for the company s relationship with its auditors. (A copy of paragraph 4 of the Code is attached.) Guideline against which reporting is required. Refer to the answer to

15 The Companies Act provides that an auditor of a company must ensure, in carrying out the duties of an auditor, that his or her judgment is not impaired by reason of any relationship with or interest in the company or any of its subsidiaries. The Companies Act also prevents certain persons from being appointed as auditors (including directors and employees of the company). Requirement. Pre The Financial Reporting Act requires that the auditor s report states the existence of any relationship (other than that as auditor) that the auditor has with, or any interests that the auditor has in, the company or any of its subsidiaries. Requirement. Pre

16 The Securities Commission Principles state that the board should ensure the quality and independence of the audit process. The board should satisfy itself that there is no relationship between the auditor and the company or any related person that could compromise the independence of the auditor, and should require confirmation of this from the auditor. Guideline. February The Auditor s Code contains rules relating to auditor independence. Requirement for auditors. January Are there limitations on the type of non-audit work an auditor (or a consulting firm related to the auditor) can do for an audit client? Yes. The Auditors Code prohibits firms from providing audit clients with accounting and bookkeeping services, including payroll services and the preparation of financial statements and financial information forming the basis of the financial statements, except in emergency situations. Requirement for auditors who are members of ICANZ. January

17 The Auditors Code prohibits auditors from acting for an audit client in the resolution of a material tax dispute or tax litigation. Where an audit client provides a firm with an unduly large proportion of the audit firm s total fees, the Auditors Code requires the firm to withdraw from the audit engagement. The Securities Commission Principles provide that limiting non-audit work that an accounting firm can do for the client entity will help maintain independence and objectivity. The quantum of fees paid for non-audit work will also be a factor in determining independence. Guideline. 17

18 2.5. Have any specific internal approval procedures been prescribed for approving nonaudit services to be performed by auditors? No. However, the NZX Code provides that the formal and transparent framework for the company s relationship with its auditors (which is referred to in the answer to 2.3) should: address what, if any, services (whether by type or level), other than in their statutory audit role, may be provided by the auditors to the company; and provide for the monitoring and approval by the audit committee of any service provided by the auditors to the company other than in their statutory audit role. Guideline against which reporting is required. Refer to the answer to Are there any restrictions on the employment of auditors or former auditors by the audit client? No. 18

19 2.7. Are there any other restrictions on, or disclosure requirements relating to, the extent of the relationship between the auditor and the audit client, including the disclosure of fees for any non-audit services? Yes. The Companies Act requires each annual report to state the amounts payable by the company to the auditor as audit fees and, as a separate item, fees payable by the company for other services provided by the auditor (i.e., for non-audit services). Requirement. Pre The Financial Reporting Act requires an auditor to disclose in the audit report the existence of any relationship with, or interest in, the company or its subsidiaries. Requirement. Pre The Securities Commission Principles state that the board should explain in the entity s annual report what non-audit work was undertaken and why this did not compromise auditor independence. Guideline. February

20 2.8. Are auditors subject to self-regulation or are they regulated by an independent or state body? In broad terms, a person cannot be appointed as an auditor unless the person is a chartered accountant. Chartered accountants are subject to regulation by ICANZ, a self-regulatory organisation. Pre Is there a requirement to have a separate audit committee (or internal board of auditors)? Are there any independence standards or requirements for audit committees (or internal board of auditors) that are different from general standards applicable to boards of directors and other board committees? Yes. The Listing Rules require that a separate audit committee should be appointed and must consist entirely of directors of the company (and the NZX Code suggests that these should be nonexecutive directors). The minimum number of members of the committee is three. At least one member must have an accounting or financial background. A majority of the members must be independent directors. Such a high threshold is not required for general boards of directors or other board committees. Requirement. Listing Rules amended on 29 October 2003; compliance is required by the later of 29 October 2004 or 12 months from the conclusion of the company s 2003 annual meeting. 20

21 The Securities Commission Principles state that all entities should use committees where this would enhance effectiveness in key areas while retaining board responsibility. Listed companies should establish an audit committee of the board with responsibilities to recommend the appointment of external auditors, to oversee all aspects of the entity-audit firm relationship, and to promote integrity in financial reporting. The committee should comprise non-executive directors of whom: a majority are independent; at least one is a chartered accountant or has another recognised form of financial expertise; and the chairperson is an independent director and is not the chairperson of the board. Guideline. February

22 The IOD Code provides that the audit committee should: comprise only non-executive directors; meet at least three times a year; and meet with the external auditor at least once a year (and for at least part of that meeting no executive directors or other employees of the company should be present). Guideline Pre Are there specific guidelines or requirements allocating power between management and the audit committee (or internal board of auditors)? Yes. The Listing Rules provide that the responsibilities of the audit committee include: ensuring that the board is properly and regularly informed and updated on corporate financial matters; recommending the appointment and removal of the independent auditor; meeting regularly to monitor and review the independent and internal auditing practices; having direct communications with, Requirement. Listing Rules amended on 29 October 2003; compliance is required by the later of 29 October 2004 or 12 months from the conclusion of the company s 2003 annual meeting. 22

23 and unrestricted access to, the independent auditors and any internal auditors or accountants; reviewing the financial reports and advising all directors whether they comply with the appropriate laws and regulations; and ensuring that the external auditor or lead audit partner is changed every five years Is the audit committee responsible for the selection and oversight of external auditors? May the audit committee, on its own initiative, hire independent consultants or advisers? 6 Yes, the audit committee is responsible for the oversight of external auditors (refer to the answer to 2.10). There is no requirement that the audit committee be permitted to hire, on its own initiative, independent advisers. Requirement. Listing Rules amended on 29 October 2003; compliance is required by the later of 29 October 2004 or 12 months from the conclusion of the company s 2003 annual meeting. 6 If a company is required to have an internal board of auditors in your country, please also explain how such auditors are selected. 23

24 2.12. Is there a formal requirement that complaint procedures exist allowing accounting-related complaints and irregularities to be brought directly by employees to the audit committee? 7 No. However, the NZX Code provides that a listed company should formulate a code of ethics to govern its conduct, which should provide mechanisms to report unethical behaviour. Guideline against which reporting is required. Refer to the answer to 1.6. The Securities Commission Principles state that the audit committee should have a defined process for dealing with complaints from auditors. The committee should also be open to the views of employees or others who believe that auditor independence is or might be compromised. This includes whistleblowing actions by individuals who act in good faith with respect to external and internal audit processes. Guideline. February If specific procedures are required for processing external (non-employee) complaints, please describe them as well. 24

25 3. Monitoring of Management 3.1. Are there any requirements for board or shareholder approval of executive compensation? Have there been any recent instances of shareholder objection to or revolt over executive compensation? No. The Listing Rules do not require shareholder approval of all executive compensation packages. However, the Listing Rules do require shareholder approval of director remuneration. There have been several recent instances of shareholder objection to executive compensation, particularly in relation to companies that have been the subject of poor performance. A number of companies have voluntarily abolished retirement allowances as a result, in part, of increasing shareholder activism (particularly by the New Zealand Shareholders Association, which was formed in 2001). 25

26 3.2. Are there any disclosure requirements with respect to top management compensation? Are there any legal limits on executive compensation? If so, do such disclosure requirements and/or limitations apply on an ongoing basis, or only in specific circumstances? Yes. The Companies Act requires each annual report to state: in respect of each director or former director of the company, the total of the remuneration and the value of other benefits received during that accounting period; and the number of employees or former employees of the company (not being directors) whose remuneration and other benefits exceed N.Z.$100,000 (in brackets of N.Z.$10,000). Requirement with respect to disclosure. Pre There are no legal limitations on the amount of executive compensation. The Securities Commission Principles state that the board should have a clear policy for setting remuneration for executives and should disclose that policy in its annual reports. Guideline. February

27 3.3. Is there any requirement or practice with respect to the enactment and maintenance of a code of ethics governing management? Yes. The NZX Code provides that a company should formulate a code of ethics to govern its conduct, which should deal with the following matters: conflicts of interest; receipt and use of corporate information; receipt and use of corporate assets and property; directors giving proper attention to the matters before them; a general obligation to act honestly and in the best interests of the company as required by law; and compliance with any other applicable laws, regulations and rules. Codes of ethics are increasingly being adopted by listed companies. Refer to the answer to

28 The Securities Commission Principles state that the board of every entity should adopt a written code of ethics that sets out explicit expectations for ethical decisionmaking and personal behaviour in respect of: conflicts of interest, including any circumstances where a director may participate in board discussion and voting on matters in which he or she has a personal interest; Guideline. February proper use of an entity s property and/or information; including safeguards against insider trading in the entity s securities; fair dealing with customers, clients, employees, suppliers, competitors, and other stakeholders; giving and receiving gifts, 28

29 facilitation payments, and bribes; compliance with laws and regulations; and reporting of unethical decision making and/or behaviour. Every code of ethics should include measures for dealing with breaches of the code. Every entity should communicate its code of ethics to its employees and provide employee training. Whistle blowing procedures should be provided. Every board should have a system to implement and review the entity s code of ethics. The board should monitor adherence to the code and hold directors, executives, and other personnel accountable for unethical behaviour. 29

30 Every entity should publish its code of ethics. Annual reports should include information about the steps taken to implement the code and monitor compliance, including as appropriate any serious instances of unethical behaviour and the action taken Except in the case of banks, is there a prohibition on company loans to directors or executive officers? Yes. The Listing Rules provide, generally, that a company may not lend money to a director or officer of that company or any of its subsidiaries where a materiality threshold is reached, unless shareholder approval has been obtained. Requirement. Pre

31 The Companies Act provides that a company has the right to avoid any transaction in which a director is a party, provided that this is done within three months after the transaction has been disclosed to all the shareholders. There is no right to avoid a transaction if the company has received fair value under the transaction. Requirement. Pre Shareholder Participation and Voting 4.1. Is there a requirement that all or certain types of shareholders (i.e., institutional investors) vote? No, subject to the company s constitution. 31

32 4.2. Are there any legal or practical limits on the voting rights (or the exercise thereof) of certain types of shareholders? 8 No, subject to the company s constitution Are longer-term holders afforded greater voting rights? No Are there any requirements for institutional investors to disclose their voting records and/or voting policies? No. 8 Please describe any legal limitations or customary procedures which may disadvantage certain types of shareholders. For example, electronic voting procedures, limitations on proxy voting or proxy collections, ability of registered shareholders to split vote (i.e. depositaries), minimum holding period requirements, etc. 32

33 4.5. Are there any requirements to permit minority shareholder initiatives to be included in proxies? Yes. The Companies Act provides that a shareholder may give written notice to the board of a matter the shareholder proposes to raise for discussion or resolution at the next meeting of shareholders. Requirement. Pre Are shareholder initiatives required to be distributed by the company at the company s own expense? Yes. The board must, at the expense of the company, give notice of the shareholder proposal and the text of any proposed resolution if the shareholder s notice is received by the board not less than 20 working days before the last day on which notice of the relevant meeting is required to be given by the board. Requirement. Pre

34 4.7. Are shareholders agreements required to be made public? No. However: to the extent that an agreement between shareholders is expressly contained in the constitution of a company (and it need not be), it will be publicly available; and in many cases shareholders agreements (to which a company is party) will be a matter of public record because they will be publicly filed as material contracts as part of the capital raising disclosure requirements under the Securities Act. 5. Disclosure 5.1. Have there been significant changes in disclosure requirements during the last 3 years? If so, what kinds? Yes. The Listing Rules implement a new continuous disclosure regime requiring Requirement. December

35 companies to immediately disclose material information (see the answer to 5.4 below). The Listing Rules require public reporting of the company s adherence to the principles of the NZX Code. Guideline against which reporting is required. Refer to the answer to 1.6. The Securities Markets Act implemented a new regime requiring disclosure by directors and officers of listed companies of their trading in securities of the issuer and its related companies. Requirement. May How frequently must listed companies file periodic disclosures? New Zealand-listed companies must file half-yearly. Requirement. Pre Have any increases in the frequency of disclosures been No, there have not been any changes in the frequency of periodic reporting 35

36 recently required? requirements other than the introduction of the continuous disclosure regime referred in the answer to 5.4. (Quarterly reporting was considered by the NZX but rejected because the compliance costs of this reporting were perceived to outweigh the benefits of a continuous disclosure regime.) 5.4. What types of disclosures, if any, must be made on a continuous basis? If the system is a continuous disclosure system, how is it enforced? Please note that the following is a very general summary. (A copy of Listing Rules 10.1 to 10.9 is attached.) Continuous disclosure The Listing Rules and the Securities Markets Act require material information to be disclosed once the company becomes aware of that information (unless there are particular reasons to withhold it). Requirement. Most of the requirements were implemented in December If material, the following information would require disclosure: 36

37 a change in the company s financial forecast or expectation; the appointment of a receiver, manager or liquidator; a significant transaction (generally, where the consideration is 5%, or more, of the written-down value of the company s consolidated assets); a recommendation or declaration of a dividend or distribution (or that a dividend will not be declared); undersubscription or oversubscription to an issue; documents containing market sensitive information that the company lodges with an overseas stock exchange or other regulator, which is available to the public; giving or receiving notice of intention to make a takeover; and an agreement between the company and a director. There is also a duty on each company to 37

38 correct false information in the market and notify changes of reporting periods. Certain other specified information must be submitted to the NZX as soon as the information is available. This information includes: non-arms length arrangements; major changes of control or direction; any proposed change in the general nature of the business of the company; and any change in the directors or auditor. Enforcement of these disclosure rules comes within the NZX s and the Securities Commission s general enforcement powers. Directors and Officers Disclosure Regime This new regime is contained in the Securities Markets Act and the related 38

39 Regulations. A director or officer of a listed company who acquires or disposes of a relevant interest in a security of that company must make disclosure in the prescribed form. Disclosure must be made by filing with the NZX and the company (for inclusion in its interests register). Persons who fail to make the necessary disclosures commit an offence and are liable to fines of up to $30,000. Such persons may also be ordered to disclose information by the Securities Commission. The first disclosure notice was required to be delivered in May Subsequent notices are required within five trading days of any trading in the relevant securities. The disclosure requirement applies to all 39

40 directors and officers of any listed company. Officers are those who are concerned in, or take part in, the management of the business Is there a requirement for companies to have specific internal disclosure controls and procedures? Yes, see answer to Refer to the answer to Refer to the answer to Is there a requirement or practice of having a disclosure committee? (If so, has this practice developed among listed companies not also listed in the U.S.?) No. 40

41 6. Enforcement 6.1. Please indicate whether the securities regulator has any of the following enforcement tools at its disposal: Consent decree/plea bargaining authority Authority to remove and/or bar officers and directors from service at a The Securities Commission has a broad range of general investigation and enforcement powers, including the power to: inspect documents; receive evidence; summon witnesses; and accept, and enforce, undertakings. Pre

42 Continuous disclosure In the context of the continuous disclosure regime, the Securities Commission has the power to order a company to disclose information or publish corrective statements but any additional sanctions that may be imposed are the realm of the court. Directors and officers disclosure Requirement. December The Securities Markets Act empowers the Securities Commission to order disclosure by directors and officers in order to secure compliance with their obligations under the disclosure regime. The Act also contains penalties of up to $30,000 for failure to comply with a disclosure obligation or for failing to comply with a disclosure order issued by the Commission. 42

43 NZX Discipline is a body created to hear and determine (including penalties, if any) any matter involving any securities market participant or issuer. NZX Discipline has wide-ranging powers, including the ability to: receive evidence; suspend market participants; suspend the quotation of an issuer s securities; make disclosure orders; or order the following penalties (among others): issue a private reprimand; publicly censure the company; revoke, or suspend, that company s listing on the NZX; order the company to pay a penalty; and require the company to take remedial action. May

44 6.2. How frequently are enforcement actions taken by the securities regulator? 9 The Securities Commission completed 105 surveillance or enforcement inquiries for the year ended 30 June Has there been any recent increase in enforcement by the securities regulator? 10 The Securities Commission completed 109 surveillance or enforcement inquiries for the year ended 30 June However, expenditure by the Securities Commission increased by 25% from 2002 to 2003 and there has certainly been a dramatic increase in awareness around securities market regulatory issues and increased activity generally by the Securities Commission Provide this information only if it is readily available. Anecdotal views are acceptable. 44

45 6.4. Can shareholders seek damages against management, directors and/or the corporation formally as a group? Yes. The Companies Act provides that a shareholder may be appointed by a court to represent other shareholders in a class action against the company or any of its directors. Pre Can directors liability be limited by the board or shareholders? No. However, the Companies Act provides that, if expressly authorised by its constitution, a company may indemnify a director or effect insurance for that director in respect of liability to any person other than the company or any related company for any act or omission of that director in his or her capacity as a director or employee and in respect of any costs incurred by that director in defending or settling any claim or proceeding arising out of such act or omission. Pre Is there a requirement that an unsuccessful plaintiff pay the Generally speaking, the unsuccessful party to a proceeding (plaintiff or defendant) 45

46 defendant s legal fees? should pay costs (typically, 30% to 60% of that party s costs) to the successful party. However, any award of costs is subject to judicial discretion. 46

47 7. Overview 7.1. In your opinion, have the recent corporate fraud scandals and developments in corporate governance, auditing and disclosure regulations in other jurisdictions significantly influenced the local independent or state regulators to adopt new regulations? It is clear that recent corporate fraud scandals and developments in corporate governance in other jurisdictions have driven New Zealand policy makers to the consideration and implementation of new rules and guidance. This is evidenced by the actions of local regulators, who have referred to those worldwide events and developments in pushing for corporate governance regulations and standards to be strengthened in New Zealand. The introduction of the NZX Code and the Securities Commission Principles in conjunction with the general review of securities regulation in this country since 2000 are evidence of this. The influence of overseas developments is unsurprising given that: New Zealand relies heavily on foreign 47

48 investment and, therefore, to be a viable destination for international investment, it is generally considered that governance standards need to be recognised, understood and accepted by the international investing community; and a number of listed companies are either subsidiaries of overseas companies or are dual-listed. It is notable that, since 2000, New Zealand has not witnessed any corporate fraud scandals of the scale and scope of witnessed in many other jurisdictions in the same period. 48

49 7.2. In your opinion, how effective have the recent changes described above been in improving investor confidence? This is difficult to answer given that many corporate governance changes have either been recently implemented or are still in their development stage. In addition, it is difficult to gauge what effect international corporate collapses and scandals have had on investor confidence within New Zealand to begin with. However, there has been steady growth in the New Zealand share market since 2000 which, together with the significant increase in regulatory activity and public awareness with respect to securities laws and regulation, might be perceived to reflect an increase in investor confidence Do you expect to see greater international convergence of corporate governance, auditing We expect to see greater international convergence. However, convergence will be limited by the different approaches that 49

50 and disclosure standards in the near future? How is this process likely to be affected, if at all, by unique local social, economic and/or political conditions in your country? have been taken thus far: the United States has adopted what is perceived to be a rules-based approach to governance, whereas Australia and the United Kingdom have adopted a principlesbased approach (with New Zealand having adopted what is perceived to be a hybrid of the two, but certainly more similar to a principles-based approach). In addition, New Zealand auditing and accounting standards are likely to converge toward those standards promulgated by the International Federation of Accountants and the International Accounting Standards Board, respectively, rather than toward United States-led initiatives. New Zealand-listed companies are varied in size and scale, but are relatively small by international standards. This means that some of the rules and standards adopted overseas need to be tailored 50

51 before they can be applied locally. In particular, a one size fits all mentality is not perceived as being appropriate. The relatively small size of New Zealand-listed companies has been one of the primary drivers behind the adoption, in part, of a principles-based approach to corporate governance. The introduction in New Zealand of a requirement that boards of directors be comprised of a number of independent directors has given rise to a particular concern that, due to the relatively small pool of qualified independent directors that exist in New Zealand (by international standards), a company may struggle to obtain the requisite number of sufficiently qualified independent directors. 51