New Zealand

Author: | Published: 9 Oct 2003
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The topic of corporate governance has generated significant discussion in New Zealand in the past year. It has been at the forefront of directors' minds and is often discussed in the boardroom. Generally, the director community welcomes the increased focus on corporate governance and is looking at how to use good corporate governance policies to enhance company performance.

The New Zealand Stock Exchange (NZX) has finalised changes to its Listing Rules to require listed issuers to follow certain rules and it has also issued a best practice code (which must be disclosed against to the extent an issuer's governance differs materially from the code). The changes to the NZX Listing Rules will now be reviewed by the Securities Commission. The Securities Commission is required to advise the Minister of Commerce whether or not to disallow any of the proposed rule changes on the basis that they would be against the public interest to allow them. We consider it unlikely that the Commission will make a disallowance recommendation and that, accordingly, the final rules will be approved by the Minister so that they become operative by mid-October 2003.

The rules are a combination of some mandatory rules and best practice principles. They become effective either 12 months from the rule changes or 12 months from an issuer's 2003 annual meeting, whichever is later. The mandatory rules include a requirement to have a minimum number of independent directors, that issuers have an audit committee, and a requirement to report on how the corporate governance principles adopted by an issuer differ materially from the NZX best practice code. Best practice principles include separation of the role of CEO and chairman, director training, adoption of a formal process for director nomination, promotion of director evaluation, prohibition on auditors doing both audit and non-audit work, appointment of a director remuneration committee and recommending directors receive some of their remuneration through equity participation in the issuer.

The Institute of Chartered Accountants of New Zealand has published a report on corporate governance. It makes 22 recommendations. One large audit firm has described it as a consensus-based document that has failed to tackle the issue of auditor regulation in not recommending that this be moved to an independent body.

On July 10 2003 the Minister of Commerce announced that she had asked the New Zealand Securities Commission to "lead the development of a set of corporate governance principles to establish a benchmark for shaping the behaviour of New Zealand businesses." The Securities Commission is required to report back to the Minister by the end of 2003. In formulating its recommended principles to the Minister, the Securities Commission intends to consult widely with the director community and other stakeholders. The chairman of the Securities Commission has stated that the Commission's report will be on a principles, as opposed to prescriptive, basis.

The New Zealand government supports harmonisation of business laws between New Zealand and Australia to the extent practicable. In Australia, consideration is being given to the government's latest chapter on corporate law reform, Corporate Law Economic Reform Program, Clerp 9. If Clerp 9 is adopted in Australia it is likely that the New Zealand government will make similar changes to corporate law. This would effectively give the force of law to certain matters within the field of corporate governance which could otherwise be seen as best practice principles.


Appointment and removal of directors is a matter for shareholders. Unless a company's constitution provides otherwise, appointment or removal is by way of an ordinary resolution of shareholders.

Under the NZX Listing Rules, a company must have a minimum of three directors. Under the proposed changes to the Listing Rules discussed above the minimum number of independent directors must be one-third of the total number of directors, but no less than two.

The finalised Listing Rules contain a definition of an independent director. A director is independent for the purposes of the rules if he or she has no direct or indirect interest or relationship that could reasonably influence in a material way the director's decisions in relation to the issuer. The rules set out some circumstances where a director is deemed not to be independent.

The Listing Rules contain other provisions relating to the appointment and rotation of directors.


The Companies Act 1993 sets out the duties of directors. It is expected that, over time, these may be added to by the Courts. The prescribed duties are as follows:

  • a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company. Directors of wholly-owned subsidiaries, partly-owned subsidiaries and joint venture companies can act in the best interests of their parent and not the relevant subsidiary or joint venture, subject to satisfying certain conditions;
  • a director must exercise a power for a proper purpose;
  • a director must not act or agree to the company acting in a manner that contravenes the Companies Act or the constitution of the company;
  • a director must not agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company's creditors, or cause or allow that situation to arise; and
  • a director must not agree to the company incurring an obligation unless the director believes on reasonable grounds that the company will be able to perform the obligation when it is required to do so.

The Companies Act prescribes a standard of care which directors must observe. The test is an objective one and has regard to the nature of the company, the nature of the decision, the position of the director and the nature of the responsibilities undertaken by the director.

In exercising powers or performing duties, directors are entitled to rely on reports and advice from employees and professional advisers. Directors must be satisfied that the person providing the relevant advice or report is competent in the particular area. In addition, directors must act in good faith, make proper enquiry and have no knowledge that reliance on the advice or information is unwarranted.

Directors owe most of their duties to the company. Duties owed to shareholders (duties in relation to supervising the share register, disclosure of interests and share dealings), are limited.


Under the Financial Reporting Act 1993 directors of reporting entities must ensure that the financial statements of the entity comply with the Act, and are signed by two directors of the entity (unless the entity only has one director). Foreign companies and their subsidiaries will be reporting entities. Directors of reporting entities that have one or more subsidiaries have similar obligations in relation to group financial statements. The only companies that are not reporting entities are comparatively small New Zealand owned companies.

Directors of issuers are required to ensure that the financial statements are audited. Directors of issuers, overseas companies, subsidiaries of overseas companies and companies 25% owned or controlled by overseas persons are required to ensure that, within a prescribed timeframe, financial statements of the issuer and any group financial statements, together with the auditor's report, are delivered to the registrar of companies for registration.


The Companies Act 1993 contains provisions in relation to interested directors. In essence, a director is interested in a transaction if he or she will directly or indirectly have a material financial interest in a transaction or is a director, officer or trustee of another party to a transaction (unless that other party is the company's holding company or related company).

In relation to transactions in which a director has an interest:

  • the director must, on becoming aware of the fact that he or she is interested, enter in the company's interest register and disclose to the board the nature of the interest and, if the monetary value can be quantified, the value of the interest - if not, then the nature and extent of the interest;
  • if the transaction is between the director and the company, in the ordinary course and on usual terms and conditions, then there is no requirement for disclosure;
  • a director can make a general disclosure in relation to another company of which he or she is a shareholder, director, officer or trustee;
  • a transaction in which a director is interested can be avoided at any time within three months after the transaction is disclosed to all shareholders if the company did not receive fair value under it;
  • the interested director provisions do not apply to remuneration or other benefits paid to a director by the company, or an indemnity given by the company, or insurance paid for by the company for a director if the relevant provisions of the Companies Act in relation to those matters are complied with;
  • subject to a company's constitution, the Companies Act 1993 permits an interested director to vote on the matter in respect of which the interest arises, attend directors meetings about the matter, participate in discussions, count in the quorum, and so on. However, the Institute of Directors best practice statements recommend that conflicted directors not form part of a quorum, not participate in discussions on the matter (and indeed withdraw from the meeting) except to the extent requested by the board, nor should they vote (unless the matter is one in respect of which directors are required to sign a certificate under the Companies Act); and
  • despite the provisions of the Companies Act, the NZX Listing Rules prohibit an interested director from voting on matters in which they have an interest.


Other disclosure obligations include:

  • the requirement in a company's annual report to disclose details of directors' disclosures in the interests register, director remuneration and other benefits received by directors;
  • the continuous disclosure rules of the NZX which came into force in December 2002. Typically it is the boards of companies that are faced with decisions over whether a matter must be disclosed under these rules. In essence, issuers are required to disclose material information concerning it immediately to the NZX unless certain circumstances apply;
  • listed issuers have an obligation to disclose promptly to the NZX all arrangements with directors or associated persons of directors; and
  • disclosure obligations under the NZX Listing Rules in relation to any securities of an issuer in respect of which directors have a relevant interest.

In summary, within five days of trading, disclosure must be made to the NZX and the issuer.


While the Companies Act makes it clear that directors are responsible for the management of the company, the Act provides that "major transactions" must be approved by a special resolution of shareholders.

A major transaction is one having a value of more than half of the company's gross assets (including acquiring rights, interests or obligations the value of which is more than half of the company's assets).

The NZX Listing Rules have additional rules for listed companies with regard to related party transactions and major transactions.


Appointment of the auditor is a shareholder matter (directors can fill a casual vacancy). However, in line with international practice, many larger New Zealand companies have an audit committee made up of independent directors. Typically, the audit committee monitors the company's financial reporting and its relationship with its auditors and nominates replacement auditors (or reconfirmation of the existing auditor) to shareholders.


Subject to certain exceptions, the Companies Act permits companies to take out insurance for directors and employees and indemnify them for certain liability subject to certain criteria being satisfied. To take advantage of this a company's constitution must permit the granting of insurance and/or an indemnity.

Companies cannot provide insurance or grant an indemnity for criminal liability. There are also limitations over other types of cover or behaviour.

If a company agrees to provide insurance for directors or grant an indemnity, then details of these need to be included in the company's interest register. Directors who vote in favour of granting insurance must sign a directors certificate stating that the cost of insurance is fair to the company.


Traditionally, small shareholders and institutional investors in New Zealand have not been active in companies. This has changed recently. Organisations such as the New Zealand Shareholders' Association (which typically represent smaller shareholders) now regularly comment on matters which affect smaller shareholders of listed companies. Institutional shareholders have also become more active, at least, in voting on crucial issues at shareholder meetings.


Non-voting shareholders have the rights conferred on them by the terms of issue of their shares. They will be a separate interest group under the Companies Act. A company cannot take action that affects the rights of a separate interest group (such as non-voting shares) without a special resolution of each interest group (that is, a special resolution of the non-voting shareholders and ordinary shareholders).

If an interest group (such as non-voting shareholders) approves action by the company that affects the rights of that interest group, those members of the interest group who cast all their votes against the proposal, can require the company to purchase their shares.


There is a recognition by many companies of the fact that their actions affect the whole community, including the environment. Good corporate governance includes having appropriate risk management policies and systems in place to manage risks in a way that is appropriate to the business, including environment risk. The fact that companies are putting these sorts of policies in place with a view to limiting harm to the environment is obviously positive.


While New Zealand is yet to develop a formal response to the issue of corporate governance, the topic is being debated intensely and is at the forefront of directors' minds.

The NZX's corporate governance rules and best practice code have now been finalised and should become effective from mid-October 2003. The Securities Commission will report to government by the end of 2003 on the approach it recommends be taken in the New Zealand context. Whatever response is developed it should be expected to recognize that corporate governance is evolutionary and should not be seen as set in stone.

Cathy Quinn

Cathy is the chair of the National Corporate Group of Minter Ellison Rudd Watts and a member of the New Zealand Securities Commission.

While Cathy Quinn is a member of the NZ Securities Commission, the views expressed in this article do not necessarily reflect their views. They are the views of Minter Ellison Rudd Watts and Ms Quinn.

Minter Ellison Rudd Watts
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PO Box 3798
New Zealand
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Fax: +64 9 353 9701