Following an initial consultation in May 2023, NZX has released its proposed amendments to the director independence settings in the Code and Rules, scheduled to take effect for financial years commencing on or after 31 December 2024. 

NZX will be holding workshops on certain aspects of its second consultation in late May and early June, with submissions closing on 14 June 2024.

In this article we discuss key aspects of the proposed amendments and outline the Code settings that will not be changing.
 
NZX began its review due to stakeholder feedback that the framework for director independence needed strengthening.

Key Proposals for Enhancing Director Independence

• Purpose statement: NZX will include a statement setting out that the purpose of director independence requirements is to bring an independent perspective to board decision making that is not aligned with management or a particular shareholder group.
• Director shareholdings: the threshold indicating a disqualifying relationship will increase from 5% to 10%.
• Disclosure requirements: listed companies will have additional disclosure requirements for independent directors where a Code factor indicating lack of independence is present.
• Audit committees: must include at least one independent director with an accounting or financial background.

Enhanced Disclosure

Where a Board determines that a director is independent, despite a Code factor suggesting otherwise, the Board must include a description of the interest, relationship or position that triggered the Code, and the Board’s reasons why it does not result in a disqualifying relationship in any:

• Market announcements about that director’s independence; or 
• Notice of meeting to consider a resolution to appoint, elect or re-elect a director.

Director Residency

Currently, at least two directors of a listed company must be ‘ordinarily resident’ in New Zealand, but there is ambiguity about what ‘ordinarily resident’ means, as the ‘183-day rule’ is not determinative. 

NZX intends to develop guidance indicating that the following factors are relevant when determining residence:

• Amount of time the director spends in New Zealand.
• Director’s connection to New Zealand.
• Ties the director has to New Zealand.
• Manner in which the director lives in New Zealand.

What is not changing?

Disqualifying Relationships

NZX elected to not alter the definition of 'Disqualifying Relationships' to align more closely to the purpose of the independence requirements. The focus of the definition is the extent to which a relationship or interest could materially influence the director’s ability to bring an independent view to decisions or act in the best interests of the company.

NZX considers that the existing definition adequately reflects its focus, particularly in combination with its proposal to introduce a purpose statement into the Code. It also rejected the proposal to include cross-directorships as a Code factor that may indicate the presence of a disqualifying relationship.

Board Composition

NZX does not intend to make any changes to the requirement to have at least two independent directors on the board or the recommendation that the majority of the board should be independent.

Protection of Minority Shareholders

NZX acknowledged the need to protect the interests of minority shareholders, but is not proceeding with any of the proposals to strengthen protection for minority interests. NZX has taken the view that minority shareholders will benefit from the enhanced disclosure requirements and that there is no evidence of systemic issues.

Further feedback

NZX is also seeking feedback on the following:

• Should shareholdings that represent a significant proportion (potentially 5%) of a director’s personal wealth be a factor indicating lack of independence.
• Should directors with 12 years’ or more continuous tenure be required to stand for re-election on an annual basis.
• Whether issuers commonly seek a self-attestation from directors, or director candidates, about whether the director or candidate has a disqualifying relationship.
• Whether director residency requirements should be changed to allow directors to be resident in New Zealand or Australia.
• Whether director residency requirements should be reduced to require just one director resident in New Zealand.

Next steps

If you would like to discuss how these reforms affect you, or you would like help making a submission, please get in touch with any of the specialists below, or your Simpson Grierson contact who can assist you to liaise with the right person.