NZSA Policy Statements

Independent Directors

NZSA has long advocated for the independence of a majority of directors from the management and substantial shareholders of listed companies. Although the outcomes of this policy have varied according to the ability and acumen of the people appointed by a general meeting of shareholders, NZSA still contends that the rule is a fundamental protection for minority and retail investors.
The current NZX listing rules (rule 1.6) define an independent director as one who is not an executive officer of the issuer and has no disqualifying relationship. A disqualifying relationship is a direct or indirect relationship which could influence decisions in a material way. The definition goes on to focus on direct or indirect relationships with a substantial security holder, or a significant (10%) earning relationship with the substantial security holder.

It is reasonable to infer that independence to NZX means independence from the influence of a substantial security holder, who could act in a way that is not in the interests of smaller retail investors. In Rule 3.3.1 NZX stipulates that the minimum number of independent directors is 2, or if the board is 8 or more, 3 independents. Boards are expected to make the status of independent directors clear within 10 days of an election. The rules also specify that the audit committee be at least 3 members with a majority of independent directors.

However recent Board Policy Statements like that of Heartland NZ Ltd, have more specific rules for the qualification of Independent Director. These polices read: Non executive directors will be considered to be independent provided that they:
•    Do not hold more than 5% of the company’s listed voting shares
•    Have not been employed in an executive capacity by the company in the last 3 years
•    Are not principals or employees of a professional adviser to the company, whose billing exceeds 10% of its total revenues
•    Are not significant suppliers or customers of the company, (whose billings exceed 10% of their total revenues,)
•    Have no “material” contractual relationship with the company
•    Have no other interest or relationship that could interfere with their ability to act in the best interests of the company and independently of management
•    Are not members of the management of the company or its subsidiaries
•  The board determines that the directors are independent in character and judgement

NZSA position:
1.    NZSA will exercise its judgement over the election of independent directors in line with its policy statement on Non Executive Directors (outlined separately in our Policy Statements). This will include an objective assessment of the nature of the company, the skills of the applicant, and the time commitment required to perform the function well. Independence of mind is the primary qualification for any director.
2.    NZSA sees independence as being not only independence from a substantial security holder, but also independence from a close association with the staff, large customer or supplier, of the issuer. This will better enable the independent director to monitor and evaluate the performance and proposals of the management team. It includes the concept that the CEO (whether titled Managing Director or General Manager) is responsible to the board including the independent directors.  
3.    NZSA recognises that executive directors may on resignation, become valuable board members by virtue of their industry and company knowledge. However they should not immediately qualify as independent directors, because of their close association with the key management personnel. The gap between resignation and qualifying as independent should be at least 5 years.
4.    NZSA recognises that the pool of successful ex managers is small in New Zealand and that it is important retain industry and executive experience within companies, and so the retention of such candidates on boards is vital to the financial markets.
5.    NZSA believes that the reclassification of a non-independent director to independent director (or vice versa) is a material matter and should be treated as being subject to the continuous disclosure regime.

Voting intentions:
NZSA recognises that the definition of independent director is the prerogative of the board. Each case will be judged in line with the guidance above. NZSA will make its view known at the time of the election of directors at AGMs of listed companies.

Issued June 2014