Henri Eliot: Guiding principles for effective governance in NZ

As businesses in New Zealand are getting busier this time of the year, it feels like a good time to revisit the key guiding principles for all boards in New Zealand to follow. These responsibilities and others are critical to the functioning of the modern public company and the integrity of the public markets.

No law or regulation can be a substitute for the voluntary adherence to these principles by corporate directors and management in a manner that fits the needs of their individual companies.

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I continue to believe that corporate governance should be enhanced through conscientious and forward-looking action by a business community that focuses on generating long-term shareholder value with the highest degree of integrity.

The following are examples of key guiding principles for boards to follow:
1. The duty of the board of directors of a public company is to select a chief executive officer and to oversee the CEO and senior management in the competent and ethical operation of the company on a day-to-day basis.

2. Management is responsible (under the oversight of the board) to operate the company in an effective and ethical manner that provides long-term value for shareholders.

The board of directors, the CEO and senior management should set a "tone at the top" that establishes a culture of legal compliance and integrity. Directors and management should never put personal interests ahead of or in conflict with the interests of the company.

3. Management is responsible (under the oversight of the board) to develop and implement the company's strategic plans, and to identify, evaluate and manage the risks inherent in the company's strategy.

The board of directors should understand the company's strategic plans, the associated risks, and the steps that management is taking to monitor and manage those risks. The board and senior management should agree on the appropriate risk profile for the company, and they should be comfortable that the strategic plans are consistent with that risk profile.

4. Management is responsible (under the oversight of the audit committee and the board), to produce financial statements that fairly present the financial condition and results of operations of the company and to make the timely disclosures investors need to assess the financial and business soundness and risks of the company.

5. It is the responsibility of the board, through its audit committee, to engage an independent accounting firm to audit the financial statements prepared by management and issue an opinion that those statements are fairly stated in accordance with Generally Accepted Accounting Principles, as well as to oversee the company's relationship with the outside auditor.

6. It is the responsibility of the board, through its corporate governance committee, to play a leadership role in shaping the corporate governance of the company and the composition and leadership of the board.

The corporate governance committee should regularly assess the backgrounds, skills and experience of the board and its members and engage in succession planning for the board.

7. It is the responsibility of the board, through its compensation committee, to adopt and oversee the implementation of compensation policies, establish goals for performance-based compensation, and determine the compensation of the CEO and senior management.

Compensation policies and goals should be aligned with the company's long-term strategy, and they should create incentives to innovate and produce long-term value for shareholders without excessive risk. These policies and the resulting compensation should be communicated clearly to shareholders.

8. It is the responsibility of the company to engage with long-term shareholders in a meaningful way on issues and concerns that are of widespread interest to long-term shareholders, with appropriate involvement from the board of directors and management.

9. It is the responsibility of the company to deal with its employees, customers, suppliers and other constituencies in a fair and equitable manner and to exemplify the highest standards of corporate citizenship.

The principles discussed here are intended to assist corporate boards of directors and management in their individual efforts to implement best practices of corporate governance, as well as to serve as guideposts for the public dialogue on evolving governance standards.

As noted above, there is no "one size fits all" approach that will be suitable for all companies in New Zealand. However, to the extent that a company follows governance practices that diverge from common practice, it should consider disclosing the reasons for this and why its practices are appropriate for it, consistent with its size, industry, culture and other relevant factors.