TABLED The Diplock “Principles”

The Securities Commission report on Corporate Governance in New Zealand – Principles and Guidelines has, since its release in February, garnered its share of critics and champions.
The report identified nine corporate governance principles that it wants companies to adopt voluntarily. The Commission’s decision not to take more prescriptive approach will, say some critics, cost New Zealand access to much needed international capital.
The Director interviewed Commission chairman Jane Diplock for her response to criticisms levelled at aspects of the report.

Your first ‘principle’ calls for directors to observe and foster high ethical standards. But do you think voluntary code of ethics is sufficient to ensure directors adopt or adhere to your principles and guidelines for corporate governance in New Zealand?
The Commission has not prescribed the detail of how (the principles) should be achieved. We have asked that boards implement the principles and report on how they do it. But the way they do it is up to each entity. The guidelines suggest ways they can do it. The over-arching principle on ethical conduct is that directors observe and foster ethical standards. The accompanying first principle guideline states that boards should adopt written code of ethics. That is fairly strong suggestion that code of ethics is good idea.
However, the existence of code of ethics does not, alone, create ethical behaviour. More listed companies are, however, adopting codes of ethics. More widespread adoption and implementation of codes of ethics will bring New Zealand into line with international best governance practice and promote public confidence in governance structures and behaviour generally.

Is it possible to find truly independent directors?
Directors need to be independently minded. Directors with an independent perspective are more likely to constructively challenge each other and executives, thereby increasing board’s effectiveness.
Non-executive directors can contribute an independent perspective to board decisions. However, recent studies indicate that board effectiveness is not always enhanced by directors’ formal independence if this is given too much weight in contrast to independence of mind, and the skills, knowledge, experience and time that director can contribute to the entity. Independent representation is an important contributor to board effectiveness, but only when considered along with the other attributes sought in non-executive director.
There may be practical constraints in New Zealand if we demand too high level of formal independence. With New Zealand’s relatively small pool of qualified and experienced directors there is risk that seeking independence at the cost of all else will lead to missed opportunities to appoint directors who can contribute to board.
The underlying issues relating to director independence can by covered by:
*Directors having an independent perspective in their decision making;
*A non-executive director being formally classified as independent only when he or she does not represent substantial shareholder and where the board is satisfied that he or she has no other direct or indirect interest or relationship that could influence their judgement or decision making as director;
*The chairperson of public owned entity being independent;
*Public company boards including independent directors;
*Boards of publicly owned entities comprising majority of non-executive directors and minimum one third of independent directors;
*Boards taking care to meet all disclosure obligations concerning directors and their interests, including information about the directors and identifying which directors are independent.

Do you think board committees could end up deflecting accountability away from the board proper?
It is important that they don’t. Board committees can enhance board effectiveness through closer scrutiny of issues and more efficient decision-making in key areas of board responsibility. Committees help boards to make maximum use of particular skills, knowledge and director experience. They can also help to fairly apportion board workload among directors.
However, committees must have an effective relationship with the board as whole. Committee members must clearly understand the committee’s purpose, role and the extent of any formal delegations from the board. formal charter agreed by the board is an efficient way to achieve this.
The accountability of the board as whole must be maintained. Committee proceedings must be reported back to the board and time given for any director who is not on the board to comment on or seek explanation of the committee’s business.

Should director remuneration be linked to performance – improved when successful, dropped when not?
Adequate remuneration is necessary to attract, retain and motivate high quality directors and executives. Generally we expect remuneration to be reflected in enhanced entity performance. To some extent remuneration can also be means of sharing the financial rewards and risks of good or poor performance with directors and executives.
Executive and non-executive directors have different roles and different incentives. Drawing clear distinction between their remuneration packages gives organisations the flexibility to address their different circumstances.

Principle six says boards should “regularly verify that the entity has appropriate processes that identify and manage potential and relevant risks”. Do you think New Zealand boards are generally risk averse and that stifles innovation and creativity and this principle will reinforce that?
The principle aims to ensure that boards identify and manage potential and relevant risk effectively. Risk is an essential feature of business. Risk management is critical area of board responsibility. Boards can only be effective if they know of, and can properly assess, the nature and magnitude of the risks they face. Effective risk management can help an entity to take the risks appropriate to its business.
For listed companies, disclosure of the nature and magnitude of material risk and how the board intends to manage these will be of significant benefit to investors who need this information to make informed investment decisions. For other entities disclosure of risk management policies may be useful where these affect specific stakeholders.

Principle nine talks about respecting the interests of stakeholders within an organisation’s ownership context. Is there sufficient recognition of the importance of balance here?
Yes. Company law requires directors to act in the best interests of the company. However, advancing the interests of other stakeholders, such as employees or customers, will often also further the interests of the company and its shareholders. There is trend for listed companies to report on how they have affected their (other) stakeholders.
Good corporate governance practices will generally benefit stakeholders. In general we agree with the response to our consultation that managing stakeholder interests should be viewed as simply good business.

Do you think the lack of prescription in your report means offshore investors in particular will see it as “toothless” and that New Zealand is not keeping pace with international governance standards and requirements.
The principles are in line with international best practice. The Commission decided to take principles-based rather than rules-based approach to corporate governance as taken in the United Kingdom and Australia and as strongly supported by the consultation process.

It might not be possible to legislate effectively to prevent corrupt practices but isn’t it necessary to show that we take regulations and the rules of governance seriously?
Ethical behaviour is central to all aspects of good corporate governance. Unless directors and boards are

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