UpFront Points of principle

It took seven months, the consideration of 160 written submissions and the arguments of 71 people in discussion groups but, the Securities Commission last month produced nine guiding principles for good corporate governance.
The Commission steered clear of delivering prescriptive approach which seemed the more likely outcome when, last year, then Commerce Minister Lianne Dalziel suggested its findings might result in law changes.
Most directors will welcome the non-regulatory approach. Institutional investors, however, are likely to keep calling for more “rules” for corporates, preferably emulating the US law reforms.
The principles are, according to most commentators, sensible and predictable. They embrace the key issues on which good governance rests.
The principles are:
1. Directors should observe and foster high ethical standards.
2. There should be balance of independence, skills, knowledge, experience, and perspectives among directors so that the board works effectively.
3. The board should use committees where this would enhance its effectiveness in key areas while retaining board responsibility.
4. The board should demand integrity both in financial reporting and in the timeliness and balance of disclosures on entity affairs.
5. The remuneration of directors and executives should be transparent, fair and reasonable.
6. The board should regularly verify that the entity has appropriate processes that identify and manage potential and relevant risks.
7. The board should ensure the quality and independence of the external audit process.
8. The board should foster constructive relationships with shareholders that encourage them to engage with the entity.
9. The board should respect the interests of stakeholders within the context of the entity’s ownership type and its fundamental purpose.
But prescriptive rules or simply guiding principles, directors must accept personal responsibility for good governance standards to make any option work. More rules might define the game but they don’t make for better results unless the participants want to play by the rules.
The Commission’s report is published in full on its website: www.sec-com.govt.nz.
The principles, says the Commission chairman Jane Diplock, have been developed to help New Zealand directors and boards of all types of entities to “achieve consistently high standards in carrying out their corporate governance duties and responsibilities”. The principles support existing laws and regulations but do not impose any new legal obligations.
But while New Zealand has sidestepped the more heavy-handed regulatory approach of the US, the Commission warns that “New Zealand must heed policies and practices in other countries and aspire to standards of behaviour consistent with rising expectations in international capital markets”.
The principles also recognise that different types of entities can take different approaches to achieving consistently high standards of corporate governance.
According to Diplock, New Zealand’s corporate governance standards are by and large, “of good standard”. The behaviour of boards and directors is the key to good corporate governance, she added. “We are confident the principles will help directors and executives achieve the highest possible standards.”