GOVERNANCE LEADERSHIP CENTRE Governance Update · governance shapes culture and it can – and must be – assessed. In the financial sector, entities need well-trained staff who

LEADING GOVERNANCE

Governance Update

GOVERNANCE LEADERSHIP CENTRE

APRIL 2019

2 GovernanceUpdate | April 2019

PART 2

COURT DECISIONS AND OTHER PROCEEDINGS• The High Court’s decision in Mainzeal

• Director overturns ban

• MPI successful in pursuing directors personally

• Finding of breach of duties reversed

• Australian company director jailed for death of worker

WELCOME TO THE IoD’S

GOVERNANCE UPDATELaunched at the IoD’s 2019 Leadership Conference, this GovernanceUpdate aims to keep you informed of the latest governance developments and emerging issues. In light of the devastating events in Christchurch, leadership now is more important than ever. The director community can play an integral part in building a strong, resilient New Zealand, helping to heal the sadness and face the challenges brought by the events.

Over the past year, board responsibility for overseeing culture and conduct and the need to set the tone at the top has been reiterated in the FMA/RBNZ banking and life insurer reviews and in the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The High Court’s decision and award of compensation in Mainzeal has also highlighted the risks of being a director and related matters such as D&O insurance and litigation funding. On the policy front, the Government is pushing ahead with various streams of work relevant to directors including educational reform. This GovernanceUpdate covers these and other governance matters including:

• developments relevant to IoD’s top 5 issues for 2019

• court decisions and other proceedings involving directors

• recent policy and advocacy matters (including Tomorrow’s Schools)

• reforms in the United Kingdom and Australia

• research and guidance on topical issues and trends.

We welcome your feedback on this update and all Governance Leadership Centre publications to [email protected].

REMEMBER you can self-log up to 10 CPD points per year for governance reading. This includes BoardRoom magazine, articles online and in print and GLC publications such as this GovernanceUpdate and our DirectorsBriefs.

This update is divided into three parts:

PART 1

LEGISLATIVE AND REGULATORY UPDATES• Boards to address culture and conduct

• Wynyard investigation shines light on continuous disclosure

• Audit Quality Report and Director’s Guide

• What do directors need to know about the new NZX Listing Rules?

• Capital Markets 2029

• Takeovers and directors’ obligations

• ASX updates

• Commerce Commission enforcement

• Policy and advocacy developments

PART 3

GOVERNANCE ISSUES AND DEVELOPMENTS• Preparing for the Future of Work

• Reporting cybersecurity to boards

• Increasing focus on climate-related matters

• NZ listed company boards lag in gender diversity stats

• What are the top regional and global risks?

• Using NZBNs to help manage your business

• Shareholders and stakeholders

• Mental health and wellbeing

• Global developments and issues

3GovernanceUpdate | April 2019

PART 1

LEGISLATIVE AND REGULATORY UPDATES

• Boards to address culture and conduct

• Wynyard investigation shines light on continuous disclosure

• Audit Quality Report and Director’s Guide

• What do directors need to know about the new NZX Listing Rules?

• Capital Markets 2029

• Takeovers and directors’ obligations

• ASX updates

• Commerce Commission enforcement

• Policy and advocacy developments

Boards to address culture and conduct Board responsibility for culture and conduct and the need to set the tone at the top has been reiterated in the FMA/RBNZ banking and life insurer reviews and the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia. Other takeaways from a governance perspective include:

• Culture and conduct: By shaping how businesses are run, governance shapes culture and it can – and must be – assessed. In the financial sector, entities need well-trained staff who have good customer outcomes front of mind, policies and procedures with a customer focus, and effective speak up cultures and whistleblower policies.

• Information: Boards need to have the right information in order to discharge their functions. In some cases, the quality (not the quantity) of information from management must improve. Boards can also utilise information from third parties.

• Holding management to account: Boards need to do more with the information they receive to oversee and challenge management (especially in relation to risk).

• Risk: Boards should prioritise both non-financial and financial risks. This includes giving sufficient attention and resources to manage non-financial risks.

• Remuneration: Remuneration and incentives (particularly variable remuneration programs) tell staff what entities reward, and it is evident that poor remuneration and incentive programs in the financial services industry have led to poor customer outcomes. It is a timely reminder for boards to review remuneration policies and practices to ensure they are fit for purpose.

• Accountability: There needs to be well defined roles in entities responsible for proactively identifying conduct and culture risks, and assessing and managing such risks.

• Shareholder and stakeholder interests: Directors must exercise their powers and discharge their duties in good faith and in the best interests of companies. This does not simply involve a choice of choosing between the interests of shareholders and the interests of customers. There must be consideration of more than just the financial returns for shareholders in any particular period.

Royal Commission: Final ReportThe much anticipated Final Report of the Royal Commission was released in February. The lengthy report (over 1,000 pages long) includes 76 recommendations for reform, including making it clear that boards are responsible for misconduct in their organisations; and that financial services organisations should assess their own culture and governance, and address any problems that may be identified.

Significant reform is expected in Australia and it is uncertain the extent to which some of the changes will have a flow on effect in New Zealand. In the meantime, the New Zealand Government has signalled that it will fast track customer protection measures across the financial sector.

For more see the IoD’s article: Misconduct in the Australian Financial Sector – what can New Zealand boards learn?

Further reading• Identifying and Responding to a

Dysfunctional Culture: Key Actions for Boards (Marsh & McLennan and the Women Corporate Directors’ joint report)

• Learning from the past, transforming for the future (Wells Fargo)

• NAB Self-Assessment on governance, accountability and culture (National Australia Bank, November 2018)

• Prudential Inquiry into the Commonwealth Bank of Australia (APRA, April 2018)


Wynyard investigation shines light on continuous disclosureThe FMA has concluded its investigation with NZX into potential breaches of Wynyard Group Ltd’s continuous disclosure and fair dealing obligations. The investigation report published by the FMA reflects its view that:

• no individuals contravened the Financial Markets Conduct Act 2013

• while the FMA had issues with the quality of some of Wynyard’s announcements, it did not believe it could show a breach of the fair dealing provisions

• while there may have been a breach of the continuous disclosure obligations the FMA would not pursue the matter further given the company was in liquidation and was no longer trading, there was no prospect of recovery for investors, and it considered an action against directors would not have a reasonable prospect of success.

Wynyard’s directors released a media statement taking issue with the suggestion that there was not ongoing compliance with the continuous disclosure requirements.

Recommendations for early stage issuersThe report sets out some recommendations (at page 16) including:

• “The board must at all times remain conscious of the need to apply an enquiring mind to information received from management. We expect the boards of all issuers to empower themselves by seeking both appropriate breadth of management views and independent advice. This is of particular relevance to early stage issuers, who often have limited track records and high-growth aspirations. The board may not have had time to establish a cohesive culture or the opportunity to observe the issuer through multiple reporting cycles.

• The board should ensure that the minutes of board meetings accurately and adequately reflect the discussion and debate that has occurred.

• Early stage issuers should provide appropriate context around any guidance they release.”

TAKE NOTE

The new NZX Listing Rules include an extension to the continuous disclosure rules to include constructive knowledge of directors and officers. This means that a director or senior executive will now be deemed to be aware of information when they ought reasonably to have come into possession of it in the course of the performance of their duties. The change is aimed at ensuring issuers have sufficient governance frameworks in place for material information to be identified and disclosed to the market (eg adequate procedures, systems and controls to keep boards and management fully informed). See the NZX’s updated Continuous Disclosure Guidance Note.

Audit Quality Report and Director’s GuideThe FMA’s 2018 Audit Quality Report revealed an overall improvement in the quality of audits in recent years although it expressed ongoing concern about a variance in audit quality across individual audits within the same firm. The report also highlighted the role of directors in audit quality by emphasising the need to provide high quality information to auditors. The quality of the information received by auditors was seen to have a significant impact on the quality of the audit itself, with poor quality information meaning that some short-comings may not be identified through the audit process.

The FMA has also updated its Audit quality – a director’s guide to provide guidance for directors of FMC reporting entities.


What do directors need to know about the new NZX Listing Rules?NZX’s new Listing Rules came into force on 1 January, with existing listed entities given 6 months to transition. The new Rules have been released following a lengthy consultation period and are intended to simplify and modernise the structure of the market and the Rules.

For a summary of key changes, see What Directors Need to Know About the New NZX Listing Rules (published by the IoD and MinterEllisonRuddWatts).

NZX has also published new and updated Guidance Notes to assist directors and other stakeholders to better understand and interpret the new Listing Rules.

Updated corporate governance code for ASX entitiesThe ASX Corporate Governance Council has released the fourth edition of its Governance Principles and Recommendations (last updated in 2014). The Principles and Recommendations apply to entities listed on the ASX and follow a tiered approach to reporting (ie there are Principles, Recommendations and Commentary). Entities must disclose in their annual reports whether they comply with the Recommendations and if not, why not.

The overall structure of the updated Principles and Recommendations is largely the same as the current version however there are amendments to the Principles, seven new Recommendations (with a total of 35), and significant revisions to the Commentary.

Some of the key changes are aimed at addressing recent and emerging corporate governance issues around culture, values and trust and include reference to protecting an entity’s reputation and standing (which has replaced the proposed “social licence to operate” wording).

Another change is a new requirement for entities to have and disclose a gender diversity policy in full with measurable objectives covering the board (30% for organisations in the S&P/ASX 300 Index), senior executives and the workforce generally.

For more, see MinterEllison’s Revised ASX Corporate Governance Principles and Recommendations released.

ASX Listing Rules ReviewThe ASX is consulting on proposed measures to simplify, clarify and enhance the integrity and efficiency of the ASX Listing Rules. The last major update to the rules took place in 2016. For a summary of changes see the article Proposed Changes to ASX Listing Rules in July 2019 by MinterEllison.

Capital Markets 2029The NZX and FMA have announced an industry-led review into New Zealand’s capital markets. Capital Markets 2029 is aimed at delivering a 10 year vision for growth and wider industry participation in the sector. The findings are expected to be published in the third quarter of 2019.

Takeovers and directors’ obligationsThe IoD and the Takeovers Panel have updated The Takeovers Code – A Quick Guide for Directors. This two-page guide provides a brief overview of The Takeovers Code and outlines directors’ key obligations under the Code including setting up an independent committee, appointing an independent advisor, communicating with shareholders and preparing a target company statement.

The Takeovers Panel has also updated A Basic Guide for Directors about the Takeovers Code.

Commerce Commission enforcementThe Commerce Commission has been particularly active and successful in enforcement matters over the last few years. A recent reminder of this was in February when the High Court ordered First Gas Ltd to pay $3.4 million after it admitted engaging in anti-competitive conduct when acquiring the gas distribution assets of another company (in a Commission investigation).

MinterEllisonRuddWatts’ 2019 Litigation Forecast summarises the Commerce Commission’s recent activities and areas of focus.


Policy and advocacy developments2018 was a particularly busy year in advocating on issues relevant to directors and governance (through formal submissions on a range of policy and legislative matters and promoting our views through the media). 2019 is shaping up to be just as busy. We set out below some key policy matters and Bills.

What will become of Tomorrow’s Schools?The Independent Taskforce’s report (Our Schooling Futures: Stronger Together | Whiria Ngā Kura Tūātinitini) on the review of Tomorrow’s Schools recommends significant changes to the schooling system, including in relation to how schools are governed.

There are more than 2,500 schools in New Zealand and many IoD members are (or have been) trustees of school boards. In March, we asked members about current, and proposed, governance of schools. Thank you to the 368 members who responded to the survey. It provides valuable feedback on the proposed changes, enabling us to better represent member views in our submission. Of those who responded, more than half are or have been a school trustee.

KEY INSIGHTS FROM IOD MEMBERS INCLUDE:

• 69% of respondents agreed or strongly agreed that their school board of trustees has the right capability to govern the school effectively. Twenty-four percent disagreed or strongly disagreed, while 7% neither agreed nor disagreed (or were unsure).

• the biggest governance challenges for school boards were identified as:

• Strategic thinking (48% of respondents)

• Funding (36%)

• Property management (35%)

• Appointing and managing the principal (33%)

• more than half (57%) thought the current school governance model was effective or very effective. Twenty-nine percent thought it was somewhat effective, and 14% thought it was ineffective or very ineffective.

• the majority (63%) disagreed or strongly disagreed that the proposal to establish regional Education Hubs will improve the governance of schools. Only 21% agreed or strongly agreed that the proposal will improve governance. Seventeen percent neither agreed nor disagreed (or were unsure).

• 58% percent said they were less likely to serve on a school board if the scope of responsibility is reduced as proposed in the report, while only 12% percent said that they were more likely to serve. Thirty percent said ‘the same’ (ie their decision to serve would not be influenced by this proposal).

Key governance related recommendations in the report include:

• the role of boards should be re-oriented so that their core responsibilities are the School Strategic and Annual Plan, student success and wellbeing, localised curriculum and assessment

• Education Hubs (set up as Crown entities) would assume all the legal responsibilities and liabilities currently held by school boards with automatic ‘delegation back’ to principals regarding control of operational grants and staffing entitlements and recruitment

• further ‘delegation back’ opportunities would be provided regarding property development through five yearly agreements

• boards should be involved in the principal’s appointments and retain final right of veto on their appointment, but will not be the employer of the principal or teachers

• boards will not be responsible for decisions on student suspensions, exclusions, and expulsions

• mandatory mana whenua representation on boards

The IoD’s submission will be published at www.iod.org.nz in early April 2019.


Changes in vocational educationIn February, the Education Minister put forward a discussion document with proposals for reforming New Zealand’s vocational education system. Key proposals include:

• creating a new institution (the New Zealand Institute of Skills and Technology) bringing together the existing Institutes of Technology and Polytechnics as a single entity

• redefining the roles of education providers and industry bodies

• introducing a unified vocational education funding system.

The IoD’s submission will be published at www.iod.org.nz in early April 2019.

Zero Carbon Bill imminentThe Zero Carbon Bill is expected to be introduced into Parliament soon. This follows the Government’s consultation last year that resulted in over 15,000 submissions. The proposed Bill is expected to set out a long-term commitment to reducing carbon emissions and to provide both certainty and transparency around the future policies that will be introduced to achieve this. The main features of the proposed Bill are expected to include:

• a net zero carbon emissions target to be achieved by 2050

• emissions budgets for shorter periods of time, to help achieve the long-term target

• the establishment of an independent Climate Change Commission.

The IoD submitted on the development of the policy behind the proposed Bill and will submit on the Bill.

What will become of the Tax Working Group report?The Government is considering the Tax Working Group’s final report released in February and will provide its response in April. No policy measures are expected to come into force until April 2021.

The final report has retained the recommendation from the interim report to make directors personally liable for PAYE and GST debts of companies, albeit restricting it to “directors who have an economic ownership in the company”. The IoD has advocated against this proposal since 2016 with Inland Revenue.

Our key concern with introducing this new form of personal liability is that it may deter appropriately qualified people from serving on boards. Other concerns include the likelihood of higher compliance and insurance costs, and boards becoming weighed down by conformance rather than focusing on their core strategic role of driving business forward. Withholding funds from Inland Revenue is unlawful and it already has wide powers to take action.

See the IoD’s submission on the interim report and KPMG’s article Tax Working Group Final Report – 99 not out!

Taxation of directors’ fees

Inland Revenue finalised the last of a series of interpretation statements on the taxation of director fees in February 2019, see:

• Income Tax – Application of schedular payment rules to non-resident directors’ fees (2019)

• Income Tax – Application of schedular payment rules to directors’ fees (2018)

• Goods and Services Tax – Directors’ fees (2015)


How should the Reserve Bank be governed?The role of the Reserve Bank in safeguarding New Zealand’s financial system and how it should be governed is under review. The first of three rounds of consultation expected to take place this year has already occurred. The IoD’s submission on the review focuses on the Reserve Bank’s governance and:

• supports a shift away from the Reserve Bank single decision maker model to a governing board

• highlights the need for a balanced board (and balanced financial policy committee if it is established) of highly capable and professional directors with the right mix of knowledge, skills and experience (including considerable banking and insurance industry experience and skills demanded by a regulator)

• highlights the need for a transparent and robust appointment (and reappointment) process based on high quality analysis of the knowledge, skills and experience the board requires now and for the future.

One step closer to a new Privacy ActThe Justice Committee reported back on the Privacy Bill in March with some recommendations for change. Key matters include:

• Higher threshold for mandatory privacy breach reporting: The Bill introduces mandatory privacy breach reporting to the Privacy Commissioner and affected individuals in certain circumstances. The Committee has recommended increasing the reporting threshold from “harm” to “serious harm”. This is something the IoD called for in our submission last year (for among other reasons, to ensure reporting is not excessive and burdensome on organisations and that there is alignment with the Australian reporting regime).

• Monetary penalties and compliance mechanisms: The Privacy Bill includes fines for non-compliance up to $10,000 (up from $2,000). The Privacy Commissioner has advocated for fines for serious privacy breaches up to $1 million for organisations, and $100,000 for individuals. The Committee has not recommended increasing the level of fines. However, it has recommended that the Commissioner have the ability to publish details of compliance notices (including the identity of the agency).

The Bill is proceeding to the House for a Second Reading. See also the IoD’s 2018 submission and DirectorsBrief The Privacy Bill – how will it impact your organisation?

Stronger whistleblowing laws on the wayThe State Services Commission is leading a review of the Protected Disclosures Act 2000 to ensure it is fit for purpose and in line with international best practice. The Act facilitates the disclosure of serious wrongdoing in and by organisations and protects those who make such disclosures. It applies to both the public and private sector. Five potential options for reform were put forward as part of the review.

In our submission we supported the overall intent of the review, but expressed concern that small and medium sized organisations would be disproportionately burdened by some of the proposals for reform. We strongly opposed the proposals to require all organisations to:

• have internal whistleblowing procedures

• collect information on protected disclosures and report this to an oversight body.

The State Services Commission is currently reviewing stakeholder feedback with a view to providing advice to the Minister of State Services on final options for change.

See also the IoD’s 2018 DirectorsBrief Whistleblowing, Speak Up Culture and the Board.

Does the Charities Act review go far enough?A review of the Charities Act 2005 is the first major review since it was enacted 14 years ago. It raises a number of questions including:

• Accumulation of funds: Should charities be required to be more transparent about their strategy for accumulating funds and spending funds on charitable purposes? And should certain kinds of charities be required to distribute a certain portion of their funds each year? These questions were raised by the Tax Working Group in its interim and final reports.

• Governance standards: Should New Zealand develop governance standards to help charities to be more effective (eg emulating the NFP Governance standards in Australia)?

• Reporting: Is more support required for charities to meet their obligations? And should reporting requirements for small charities be reduced?

• Advocacy: Should charities have greater freedom to advocate for policy or law change? What should the limits be, if any?

• Te Ao Māori: What is working and not working for Māori charities?

• Charities with unrelated businesses: How should charities report on their business operations and business subsidiaries? Should charities be required to report separately on business subsidiaries that they control that are not registered charities?

The review is limited in scope and has led some experts to question whether it goes far enough to address all significant concerns with the operation of the Act. Submissions are due by 30 April 2019. The IoD will submit on the review and welcomes feedback to the Governance Leadership Centre at [email protected]


Update on other policy and bills

POLICY/BILLS WHAT’S PROPOSED? TIMELINE

Director identification numbers and residential addresses

The IoD has been advocating since 2016 to enable directors to publish a service address on the Companies Register, rather than a residential address. There was public consultation on this in 2018. Any change with addresses would likely be introduced with director identification numbers, which would provide administrative efficiencies for directors and also improve the Companies Register.

See the IoD’s 2018 submission.

This is with the Ministry of Business, Innovation & Employment (MBIE). Policy decisions on this may be finalised this year.

Beneficial ownership MBIE consulted on measures to improve the transparency of beneficial ownership of companies and limited partnerships in New Zealand in 2018. This included exploring the establishment of a public register of beneficial ownership information.

See the IoD’s submission.

This is with MBIE. Policy decisions on this may be finalised this year.

Incorporated Societies Bill

The Incorporated Societies Act 1908 is being overhauled and replaced by a new modern statute. MBIE consulted on this in 2016. Proposed changes will significantly improve governance structures and arrangements for incorporated societies.

See IoD’s 2016 submission and DirectorsBrief What’s Changing for Incorporated Societies?

This is with MBIE. A Bill may be released this year.

Commerce (Criminalisation of Cartels) Amendment Bill

The Bill would criminalise cartel conduct. It is targeted at individuals who are the decision makers for the cartel (eg directors) and their legal entity. The penalty for individuals will be up to seven years imprisonment and/or up to $500,000.

The IoD’s submission advocated against criminalisation.

The Committee of the whole House reported back in March 2019 and it is at third reading stage.

Companies (Clarification of Dividend Rules in Companies) Amendment Bill

The Bill introduces a minor and technical amendment to the Companies Act 1993 to clarify that profits can be distributed differently across the same class of shares if this is set out in a company’s constitution.

See the IoD’s submission.

This is at Select Committee and a report is due on the 15 April 2019.

Trusts Bill This Bill will replace the Trustee Act 1956 and restate and reform New Zealand trust law. The Bill includes mandatory and default trustee duties and sets out trustees’ obligations to retain records and provide information to beneficiaries.

See the IoD’s submission and DirectorsBrief What’s changing for trusts?

The Select Committee reported back in October 2018 and it is at second reading stage.

Equal Pay Amendment Bill

The Bill is aimed at improving the process for raising and progressing pay equity claims, and eliminating and preventing discrimination on the basis of sex in the remuneration and employment terms and conditions for work done within female-dominated jobs.

This is at Select Committee and a report is due on 16 April 2019.

Health and Safety at Work (Volunteer Associations) Amendment Bill

The member’s Bill would allow volunteer associations that employ a person or persons for not greater than 100 hours per week to be excluded from the definition of a PCBU under the Health and Safety at Work Act 2015.

The Select Committee reported back in November 2018 recommending the Bill not be passed and it is at second reading stage.


PART 2

COURT DECISIONS AND OTHER PROCEEDINGS

• The High Court’s decision in Mainzeal

• Director overturns ban

• MPI successful in pursuing directors personally

• Finding of a breach of duties reversed

• Australian company director jailed for death of worker

The High Court’s decision in Mainzeal There has been a lot of commentary on this case since the Court’s decision was released in February and it is being appealed. A brief overview is set out below. The IoD is considering how it can share further insights and learnings from the case for directors and will keep members informed of any other developments.

AwardAs a result of its finding, the Court ordered the directors to pay compensation to the company in aggregate of $36m (three directors are liable for a maximum amount of $6m each and the fourth is liable for it all). There is a D&O insurance policy with potential cover of $23m.

Reminder for directorsGiven that the decision is being appealed, it could be some time before matters and law are settled. Notwithstanding this, the case serves as a general reminder for directors about:

• Complexities of the role and responsibilities of being a director

• Personal liability: being a director can carry a high level of personal risk and reputational risk along with responsibility

• D&O insurance: insurance for directors should be viewed as an investment in risk management.

See also Lessons for directors from Mainzeal decision by MinterEllisonRuddWatts (who acted for the liquidators).

The High Court’s decisionThe case is complex and the Court noted “that the circumstances of the case can fairly be described as exceptional”. The Court dissected Mainzeal’s trading history and group transactions, and held that there were three considerations that cumulatively led it to conclude section 135 was breached:

• Mainzeal was trading while balance sheet insolvent because intercompany debt (ie funds extracted from Mainzeal and used elsewhere in the group of companies) was not in reality recoverable.

• “There was no assurance of group support on which the directors could reasonably rely if adverse circumstances arose.

• Mainzeal’s financial trading performance was generally poor and prone to significant one-off losses, which meant it had to rely on a strong capital base or equivalent backing to avoid collapse.”

The Court expands on the above points in its analysis and provides considerable coverage of the legal requirements under s 135. Other causes of action under the Companies Act put forward by the liquidators were unsuccessful (including claims against a fifth director).

BackgroundMainzeal Property and Construction Ltd (In Liq) was part of a group of companies that came to be known as the Richina Pacific group. After trading for many years, Mainzeal was placed into liquidation in 2013 with creditors owed approximately $110m.

In a civil case before the High Court, the liquidators of Mainzeal pursued its former directors for breach of their director duties under the Companies Act 1993. A principal claim against four of the directors was that they breached section 135 of the Companies Act. This section essentially provides that a director must not agree, cause, or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to creditors.


MPI successful in pursuing directors personallyThe Ministry of Primary Industries has taken a number of cases recently against entities and their director/s for breaches of legislation within its regulatory jurisdiction:

• Yealands Estate Wines Ltd, its founder and former director, and two former staff members all pleaded guilty to charges under the Wine Act 2003 (related to making false statements regarding export eligibility applications and material omissions in wine records). The director, who was aware of the offending but took no action to stop it, was fined $30,000.

• Another director of a company has been fined $6,000 under the Wine Act 2003 for deliberately procuring deceptive and false wine export documentation in relation to 45 cases of wine intended to be exported overseas.

• Hawkes Bay Seafoods Ltd, two of its subsidiary companies, two company directors and a manager all pleaded guilty last year to 131 charges under the Fisheries Act 1996 related to selling under-reported fish and making false statements. They have collectively been fined over $1m (In addition to the fines of the subsidiary companies and manager, Hawkes Bay Seafoods was fined $410,232 and the two directors were fined $106,686 and $86,309 respectively).

Director overturns ban A former director of three companies associated with the former chair of South Canterbury Finance Ltd (and placed in statutory management) has successfully appealed a decision by the Deputy Registrar of Companies to prohibit him from being a director for four years. The High Court stated that the purpose of the relevant section banning directors (under the Companies Act 1993) is protection of the public from unscrupulous or incompetent directors in the future. After considerable analysis of the director’s role in the companies, the Court held that the Deputy Registrar erred including by:

• exercising his discretion to ban the director, before he considered the statutory purpose of the section and whether the director’s personal circumstances posed a future risk

• overlooking the director’s position in the company and that he was in a “different category” from the former chair (of South Canterbury Finance)

• not giving enough weight to the role the director played in the wind-down of one of the companies where “he actively sought to prevent loss to the investors and was successful”.

As part of the case, the Court also upheld the Deputy Registrar’s conclusions that there was sufficient evidence to find that the three companies were mismanaged and that this was causative of statutory management being imposed. The Court considered how the companies had been governed and noted at para 165:

“Where one director is the managing and controlling director of a company, it is incumbent on all directors to have full knowledge of the financial position of the companies in which they are directors, whether they be co-partners as well as co-directors, and to subject the operation and management to regular scrutiny and monitoring. As Miller J held in Davidson, a director must have a degree of financial literacy, understand the fundamentals of the business, monitor performance and review financial statements regularly.”

THOUGHT POINT

Directors can have extensive duties and liabilities outside of the Companies Act 1993 depending on the operations of the company. Some legislation has general application, for instance the Health and Safety at Work Act 2015. Other legislation is business/industry specific (such as the Food Act 2014) or transaction/business specific (such as the Financial Markets Conduct Act 2013).

• Are you aware of all core legislation relevant to your organisation?

• Do you regularly verify that there is a high standard of compliance with any relevant regulatory requirements?


Australian company director jailed for death of worker An Australian company director has been convicted of reckless conduct under Queensland’s Work Health and Safety Act 2011 after a worker died falling off a roof in circumstances where the company had made a decision not to install safety rails at the worksite. We understand that this was the first charge of reckless conduct to be successfully tested at trial in any Australian state or territory. The director was sentenced to one year in prison (suspended after four months) and the company was fined $1m. It is noted that since the death occurred, Queensland has introduced industrial manslaughter laws with significant penalties (ie a maximum penalty of 20 years imprisonment for an individual, or $10m for a body corporate). See WorkSafe Queensland’s media statement.

TAKE NOTE

The Law Commission is expected to announce terms of reference for a review of litigation funding and class actions in New Zealand.

The Australian Law Reform Commission has recently considered similar issues in a report Integrity, Fairness and Efficiency—An Inquiry into Class Action Proceedings and Third-Party Litigation Funders (January 2019).

Finding of breach of duties reversed In March, the Court of Appeal reversed the High Court’s finding that the sole director of Debut Homes Ltd (In Liq) breached his director duties (ss 131, 135, and 136 of the Companies Act 1993). The company (which was later liquidated) was a residential property developer and the case revolves around the director’s decision at a point in time when the company was in financial difficulties, to complete and sell houses that it had been building. The Court looked at all the circumstances and essentially found that the director made at this time sensible commercial decisions in good faith and in the company’s interests, and with regard to creditors. As a result, the High Court’s order for him to pay $280,000 in compensation to the company was quashed. However, the director is still liable for over $34,000 for payments made by the company to him that were set aside as voidable transactions.


PART 3

GOVERNANCE ISSUES AND DEVELOPMENTS

• Preparing for the Future of Work

• Reporting cybersecurity to boards

• Increasing focus on climate related matters

• NZ listed company boards lag in gender diversity stats

• What are the top regional and global risks?

• Using NZBNs to help manage your business

• Shareholders and stakeholders

• Mental health and wellbeing

• Global developments and issues

Reporting cybersecurity to boardsWith CERT NZ’s latest quarterly report revealing the highest number of cyber security events reported to date (1333), it is a timely reminder to boards to ensure they are receiving comprehensive reporting from management about cyber risks and incidents, and the actions taken to address them.

Preparing for the Future of WorkThe Future of Work should be high on the agenda for directors, amid changes to workplace practices, advances in technology, changing workforce demographics and globalisation. The challenge for boards is ensuring that management are looking ahead, keeping an eye on how to maximise the potential of changing ways of working and the impact of technology, while also looking after their workers through the change, and assessing the potential risks that disruption may bring to the organisation.

See our March 2018 DirectorsBrief Preparing for the Future of Work and the February/March 2019 issue of BoardRoom.

Increasing focus on climate-related mattersThe impending Zero Carbon Bill and revamp of the Emissions Trading Scheme will have significant economic implications for some organisations, and will create both risks and opportunities. Some organisations are already taking action, including reporting on climate related risk. See the Climate Disclosure Project’s Australia and New Zealand Report released in February 2019 for insights into how some companies are reporting (including 13 companies from New Zealand).

MinterEllison’s article on The climate risk reporting journey is intended to assist boards and their committees and it proposes key questions relevant to the assurance of a corporation’s reporting on climate-related financial issues – and to the robust processes of governance and oversight on which those disclosures must be based. See also the World Economic Forum’s resource How to Set Up Effective Climate Governance on Corporate Boards: Guiding principles and questions.

To help improve reporting, the IoD and Aura Information Security have developed a resource Reporting cybersecurity to boards setting out:

• guiding principles on reporting to boards

• questions to ask in developing cybersecurity metrics

• sample dashboards.


New Zealand listed company boards lag in gender diversity statsNZX’s latest gender diversity statistics, released in January 2019, show only a slight improvement in gender diversity:

• the number of women on listed company boards (as at the end of December 2018) increased 2.5%, taking the overall percentage to 22.5% (compared with 29.7% in the ASX200 as at December 2018 and 26.7% in the FTSE350)

• in the NZX10, 33% of directors are women, while small cap companies only had 17%

• while the NZX10 has the greatest female representation, small improvements have been made across most of the other categories.

The percentage of women in officer positions has remained static at 22.7% (previously 22.9%). This is particularly concerning from a pipeline perspective.

The changes to the NZX Corporate Governance Code (which require all listed companies to have a diversity policy or explain why not) have had a positive effect, with a significant increase (38%) in the number of issuers having a diversity policy (now 78%).

In the state sector, women make up more than 45.7% of those appointed to boards, according to the Ministry of Woman’s Gender stocktake of state sector boards and committees (released in 2018).

What are the top regional and global risks?The World Economic Forum’s Global Risks Report 2019 considers the global risk landscape and identifies major threats of global disruption for 2019 and over the next decade. The top short-term risks expected to increase in 2019 centre heavily around geopolitical issues with over 90% of respondents expecting economic confrontations/frictions between major powers and 88% expecting an erosion of multilateral trading rules and agreements. Other areas of concern include technological

Using NZBNs to help manage your businessThe New Zealand Business Number (NZBN) is the globally unique identifier for all New Zealand businesses. As well as helping businesses to connect and interact faster with each other, the NZBN can help organisations manage risk:

• businesses can ask businesses they deal with to provide their NZBN (eg to ensure they are a real business)

• businesses can also create an NZBN watchlist to receive notifications when those they are trading with have changes such as a change of shareholders or directors, if the business becomes insolvent or ceases trading

• the NZBN can also assist in managing obligations under the Anti-Money Laundering and Countering Financing of Terrorism Act. The NZBN can be useful when carrying out due diligence and compulsory compliance checks as it identifies businesses with a unique identifier.

• soon the NZBN will enable e-Invoicing which will mean secure, digital invoicing between organisations with no paper, pdfs, scanning or emailing of invoices. e-Invoicing uses the NZBN to provide a direct exchange of invoice data between suppliers’ and buyers’ accounting systems, even when these systems are different. It can reduce the need for manual handling and the risk of errors through incorrect data entry. The security e-Invoicing offers will also reduce the risk of fraud which exists when emailing invoices.

Read more about the opportunities for your business with the NZBN.

vulnerabilities, environmental risks, mental health issues and our lack of readiness for any biological threats.

The Regional Risks for Doing Business 2018 (by the World Economic Forum) tests businesses’ perceptions of the global risks that they expect to be operationally challenging in the next ten years. New Zealand’s top 5 risks are:

1. Extreme weather events

2. Cyber-attacks

3. Failure of regional and global governance

4. Failure of critical infrastructure

5. Failure of climate-change adaptation


Shareholders and stakeholders Expectations of institutional investors

Every year Larry Fink, chair and CEO of the world’s largest investment company, BlackRock, writes to CEOs around the world. Fink candidly shares BlackRock’s views on corporate governance matters and highlights issues that are a focus for the firm from an investment perspective. Fink’s latest letter is relevant to New Zealand organisations and also to boards and directors, and focuses on the link between purpose and profit:

“Purpose is not a mere tagline or marketing campaign; it is a company’s fundamental reason for being – what it does every day to create value for its stakeholders. Purpose is not the sole pursuit of profits but the animating force for achieving them.

Profits are in no way inconsistent with purpose – in fact, profits and purpose are inextricably linked. Profits are essential if a company is to effectively serve all of its stakeholders over time – not only shareholders, but also employees, customers, and communities. Similarly, when a company truly understands and expresses its purpose, it functions with the focus and strategic discipline that drive long-term profitability. Purpose unifies management, employees, and communities. It drives ethical behaviour and creates an essential check on actions that go against the best interests of stakeholders. Purpose guides culture, provides a framework for consistent decision-making, and, ultimately, helps sustain long-term financial returns for the shareholders of your company.”

Fink also called for CEOs to demonstrate their companies’ commitment to their regions and communities by taking a leadership role on social and political issues such as retirement, infrastructure and helping workers prepare for jobs of the future. He discusses how the public is now holding more companies to high standards, a trend he expects to continue as more millennials enter the workforce with different expectations of their employers and the companies they buy from and invest in.

State Street Global Advisors’ President and CEO, Cyrus Taraporevala, also wrote a letter to directors emphasising the importance of corporate culture and its alignment with strategy. This includes a framework to help companies assess and monitor corporate culture.

Employers most trustedThe Edelman Trust Barometer released in January 2019 reveals that the most trusted institution is now “my employer”. Globally, “my employer” (75%) is significantly more trusted than NGOs (57%), business (56%), government (48%) and media (47%). Richard Edelman, president and CEO of Edelman, stated:

“The last decade has seen a loss of faith in traditional authority figures and institutions. More recently, people have lost confidence in the social platforms that fostered peer-to-peer trust. These forces have led people to shift their trust to the relationships within their control, most notably their employers.”


He Ara Oranga – Government report into Mental Health and Addiction The report of the Government’s inquiry into mental health and addiction was released in December 2018. The report summarises how New Zealand is currently preventing and responding to mental health and addiction problems and the needs of its people. It recommends specific changes to improve New Zealand’s approach to mental health, including major changes to current policies and laws and significant increases in funding. It notes that WorkSafe New Zealand data shows that work-related stress or mental illness experienced in the workforce is increasing each year and identifies a critical role for workplaces in promoting mental health and wellbeing. Suggestions include developing core standards for mental health and wellbeing, as well as prevention programmes to address and reduce bullying and stress in the workplace.

Global developments and issues Australia

The financial services Royal Commission has dominated air time in Australia over the last 12-18 months and is set to continue with regulatory reform on the radar (See Part 1). Other matters that have been getting attention in Australia include whistleblowing and modern slavery.

EXPANDED WHISTLEBLOWING REGIME

The Treasury Laws Amendment (Enhancing Whistleblower Protections) Bill is awaiting Royal Assent and could come into effect on 1 July 2019. Key reforms include:

• extending the group of people who can make disclosures and who can receive them

• expanding the types of wrongdoing whistleblowers can make disclosures about

• permitting anonymous disclosures

• enhancing immunities for whistleblowers and increasing penalties if their identity is revealed

• permitting disclosures to Parliament/journalists in some circumstances

• mandating that public and large proprietary companies have a whistleblower policy, with penalties applying for non-compliance.

For more, see MinterEllison’s Workplace Update: New whistleblower laws to take effect soon

MODERN SLAVERY ACT NOW IN FORCE

The Modern Slavery Act 2018 introduces requirements for large companies (with an annual revenue of $100m and above) based or operating in Australia to report on the risks of modern slavery in their operations and supply chains and actions to address those risks. This will be relevant to some New Zealand companies.

There is also a NSW Modern Slavery Act 2018 which imposes a lower revenue reporting threshold of $50m and carries penalties of up to A$1.1 million for non-compliance.

Mental health and wellbeing

Looking after our mental health and wellbeingWhile the focus is increasing on mental health and wellbeing in workplaces and the board’s role, directors also need to take care of their own wellbeing. Governing can be challenging and rewarding, but can also be stressful and isolated. The following resources include guidance and insights on personal mental health and wellbeing and also actions that can be taken to address this in workplaces:

• The New Zealand Government’s A Mental Health Guide for New Zealand Leaders

• Mental Health Foundation’s Five Ways to Wellbeing at Work Toolkit

• WorkSafe New Zealand’s Guidance on Managing Work Related Health

• Mental Health Foundation’s Working Well – A Workplace Guide

• Business Leaders’ Health & Safety Forum’s CEO guide to mental health and wellbeing at work


United KingdomSTEWARDSHIP CODE

The Financial Reporting Council has released a draft of its revised stewardship code for consultation. The Code was originally published in 2010 to encourage best practice stewardship by institutional investors and improve the quantity and quality of engagement between investors and companies. The revised draft sets higher expectations for investor stewardship and is largely in response to the number of recent high profile corporate scandals and governance failures. Key changes for signatories include:

• establishing an organisational purpose, strategy, values and culture that enables them to meet their stewardship obligations

• integrating stewardship responsibilities into investment processes

• taking into account material ESG factors, including climate change

• more rigorous reporting requirements.

The consultation period closed at the end of March, with the new Code expected to come into force in July 2019.

MODERN SLAVERY REVIEW CONTINUES

The second interim report from an independent review of the Modern Slavery Act 2015 was released in January 2019. This review considered transparency in supply chain provisions which are set out in the Act and require large commercial organisations supplying goods or services and conducting business in the United Kingdom to prepare a statement on slavery each year. Recommendations from the review include:

• improving the quality of the statements

• amending the Companies Act 2006 to include a requirement for companies to refer to their modern slavery statement in their annual reports. A board member should be designated as being personally accountable for producing the statement and failure to fulfil the reporting requirements or to act when instances of slavery are found would be an offence under the Company Directors Disqualification Act 1986

• transparency should be increased by having a central government repository where companies have to upload their statements and which the public can access free of charge

• extending the provisions to the public sector.

GUIDELINES FOR EXECUTIVE PAY

Following last year’s AGM season in the United Kingdom, which again revealed increasing levels of dissatisfaction with executive remuneration, the Investment Association (consisting of 250 investment manager members, managing over £7 trillion) has released updated Principles of Remuneration. The Principles set out the Association’s members’ views on the role of shareholders and directors in relation to remuneration and the manner in which remuneration should be determined and structured.

REVIEWING THE FINANCIAL REPORTING COUNCIL

The Independent Review of the Financial Reporting Council, led by Sir John Kingman, published its final report in December 2018. The report sets out 83 recommendations, one of which is replacing the Financial Reporting Council with an independent statutory regulator called the Audit, Reporting and Governance Authority. The Government is now consulting on the recommendation to create a new regulator responsible for audit, corporate reporting and corporate governance.

LEADING GOVERNANCE

Governance Leadership CentreFor more information see the Governance Resources section of our website www.iod.org.nz

ISSN 2537-7221 Copyright © – Institute of Directors in New Zealand (Inc)

Disclaimer: This resource should not be used or relied upon as a substitute for proper professional advice.

April 2019

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Documents

GOVERNANCE LEADERSHIP CENTRE Governance Update · governance shapes culture and it can – and must be – assessed. In the financial sector, entities need well-trained staff who