02 Board Composition and Performance

To ensure an effective board, there should be a balance of independence, skills, knowledge, experience and perspectives.

FMA Guidelines

Every issuer’s board should have an appropriate balance of executiveand non-executive directors, and should include directors who meet formal criteria for ‘independent directors’.
All directors should, except as permitted by law and disclosed to shareholders, act in the best interests of the entity.
Every board should have a formal charter that sets out the responsibilities and roles of the board and directors, including any formal delegations to management.
The chairperson should be formally responsible for fostering a constructive governance culture and applying appropriate governance principles among directors and with management.
The chairperson of a publicly owned entity should be independent. No director of a publicly owned entity should simultaneously hold the roles of board chairperson and chief executive (or equivalent). Only in exceptional circumstances should the chief executive go on to become the chairperson.
Directors should be selected and appointed through rigorous, formal processes designed to give the board a range of relevant skills and experience.
The board should be satisfied a director will commit the time needed to be fully effective in their role.
The board should set out in writing its specific expectations of non-executive directors (including those who are independent).
The board should allocate time and resources to encouraging directors to acquire and retain a sound understanding of their responsibilities, and this should include appropriate induction training for new appointees and on-going training for all directors.
The board should have rigorous, formal processes for evaluating its performance, along with that of board committees and individual directors, including the chairperson. This could extend to formally reviewing the position of chairperson on a regular basis.
Reporting should include information about each director, including a profile of experience, length of service, independence and ownership interests in the company. Information on the board’s appointment, training and evaluation processes should also be included.

Additional Forum Guidelines for NZ listed companies

General

The board should act in good faith in the best interests of the company and be accountable to shareholders.
The board is responsible for the long-term success of a company and supervision of the company’s management and business affairs.
The board is responsible for employing the CEO of the company and approving the business strategy. There should be a clear understanding of the division of responsibilities between the board and the executive. No one individual should have unfettered powers of decision.

Independence

Directors should ensure that they are independently familiar with the company’s operations and do not rely exclusively on information provided by executives or external advisers.
A board should be comprised of a majority of independent non-executive directors who are sufficiently motivated and equipped to fulfil the function of independent scrutiny of the company’s activities.
Explanation should be given to shareholders for the presence of executives on the Board other than the CEO.
As a guide, the following table outlines some of the circumstances where directors could be deemed non-independent.

A non-executive director should be independent

Factors that may compromise independence

… of executive and advisers

Employment in the past 3 years
Senior employment by a significant professional adviser in the past 3 years

… of substantial shareholders

Ownership of over 10% of the voting rights in the company’s shares
An officer, director, representative or employee of such a shareholder

… of the company’s investments

A director or employee of another company in which the main company has invested more than 10% of the share capital

… of customers, suppliers and other service providers

A major supplier or customer to the company (or their representative or executive)
A material contractual relationship with the company
Receiving fees for services to the company at a level indicative of either significant involvement in a company’s affairs, or are significant in relation to the salaries received by directors.

… of relationships which may impact decision making

Relationships (including other directorships or with related parties) that could be (or be perceived to be) capable of materially interfering with acting in the company’s best interests.
Benefiting from a related party transaction

… of incentive pay

Participation in performance incentive schemes, including options that are also granted to executives

… in a takeover bid

Participating in a bid for the counterparty (either as a buyer or seller)

… due to an appropriate length of board tenure

Non-executive directors who have served longer than nine years should be subject to annual re-election. The Board should have a succession plan in place to address long-tenure of directors.

Nomination

The board should set out to shareholders in the papers accompanying a resolution to elect a director why they believe an individual should be elected.
The board should ensure that shareholders are able to nominate candidates for board appointment. Such candidacies should be proposed to the board nomination committee.
All directors should be subject to election by shareholders at the first annual general meeting after their appointment, and to re-election thereafter at intervals of no more than three years. Non-executive directors who have served longer than nine years should be subject to annual re-election.
For each director, the company should disclose a detailed biography, including recent and current directorships in other relevant groups or enterprises. .
The company should disclose the nature of any material legal proceedings or investigations that the director has been, is, or is likely to be, involved in or otherwise implicated.

Board succession should occur on a planned and ongoing basis.

As part of the succession process:

a)   There should be sufficient overlap in director succession so that gaps in skills, experience, subject matter expertise or corporate memory do not occur, to the extent this is practicable.

b)   Any future skill gaps should be identified by following a board evaluation process.

c)   When considering a director who holds, or has held, other directorships, past performance of the director and those companies should be considered.

d)   Directors should communicate their intentions to retire from the board as soon as possible to assist succession.
A skills matrix is one effective tool to demonstrate to shareholders how skills across the boardroom link to the oversight of company operations and strategy.

Diversity

The board should disclose the company’s policy on diversity which should include measurable objectives for achieving appropriate diversity within its senior management and board and report on progress made in achieving such objectives.