Contents
In the context of its recent update to the NZX Main Board Listing Rules (Rules) and Corporate Governance Code (Code), the NZX promised that it would follow with a “deep dive” into the current director independence settings. The consultation is now underway but so far is more a belly flop than an elegant dive.
Submissions close on 30 June, the NZX having agreed to an extension from its initial deadline of 9 June after requests from several interested parties, including Chapman Tripp. We comment on the review proposals and process.
Process
The consultation paper, released on 17 May, comprises 30 open-ended questions, many of which overlap, loosely organised under the headings:
- Benefits of director independence;
- Nature of director independence;
- Minority shareholder interests; and
- Disclosure.
The timing, so soon after the 1 April implementation of the changes to the Rules and the Code, may prove fatiguing for stakeholders, particularly had the NZX stuck to its original 9 June submission close date.
We also wonder at the choice of directors’ independence as the subject. Other governance topics might have warranted examination first.
Content
What is an ‘independent’ director?
The classification of a director as not ‘independent’ is generally perceived to carry a pejorative connotation, which in our view is not appropriate.
The NZX could usefully have clarified that all company directors in New Zealand have the same duties set out in the Companies Act 1993, and there are relatively few matters in practice where boards don’t operate by consensus or, where an issuer is considering a related-party transaction or matter, where a director has an “interest”.
While an independent director perspective can enhance decision-making, in our experience a business founder or a director with ‘skin in the game,’ or with long-standing connections to the company, will often bring valuable insight to sound decision-making, and act independently of management.
Tenure (length of service)
The consultation paper floats the idea of giving minority shareholders the ability to veto a board’s assessment of the independence of a director. This reflects a concern that the present settings in relation to length of service may not adequately protect minority shareholders’ interests.
The NZX notes that some submitters to the Code review considered that adoption of 12 years or more for long tenure was at the upper end of the range, and that the Singapore Exchange Limited (SGX) has recently imposed a requirement in its Listing Rules that a director whose tenure exceeds nine years cannot be determined to be independent.
We are, however, opposed to the NZX’s proposed solution to this perceived problem.
Providing minority shareholders with a veto right would likely be impractical and administratively complex and inefficient to administer. And, it is unnecessary as they already have the right to vote against a director where not satisfied of that director’s independence.
The current Governance Code ‘independence’ factors
Context is key when assessing the benefits of a director’s independence to a particular board, especially given the list of skills and experience required of, and demands on, directors in the current climate.
We consider that the NZX should exercise caution before hardwiring prescriptive rules or formulaic criteria into the Rules or Code on when a director is to be designated as ‘independent’.
Instead, it would be more helpful to educate stakeholders on the benefits of independent directors, and that a much more contextualised assessment is required, taking into account the issuer’s overall relationships and corporate structure.
On this note, we thought it appropriate that the consultation paper raised the topic of the ‘purpose’ of independent director settings, which is a useful discussion we should be having.
The role of independence in takeovers
We are pleased that this topic is being addressed by the review and consider it is worthy of highlighting.
Director independence in a takeover context, in the sense of a director’s independence from the bidder, is more important than independence under the Rules/Code.
In our experience, takeover committees work well if they are not too big, given the need for agility. For example, in the schemes of arrangement involving each of Z Energy and Metlifecare, the takeovers committees of each of those target boards were sized such that they could make decisions and report to the board in a nimble fashion.
Next steps
We are working through submissions with a range of our client directors and NZX listed issuers. Please get in touch with any of the following contacts or your usual Chapman Tripp lawyer if you would like to contribute.
Special thanks to Laura Murton for writing this Brief Counsel.
Note: Chapman Tripp Partner Rachel Dunne has not participated in the preparation of this note as she is a member of the recently established NZX Corporate Governance Institute (CGI), which is assisting NZX with the director independence review.
