BMO Global Asset Management (BMO GAM) s comments on proposals for revision of the NZX Corporate Governance Code

Transcription

1 BMO Global Asset Management (BMO GAM) s comments on proposals for revision of the NZX Corporate Governance Code Dear Mr Macdonald, I am writing to you on behalf of BMO Global Asset Management (BMO GAM). BMO GAM is an investment management firm whose institutional retail clients collectively represent over $238 billion* of assets. In addition, BMO GAM EMEA has been mated to vote /or engage in dialogue on behalf of a further 26 investment institutions with assets, including equities corporate bonds, totalling over 72 billion ( 87 billion / $96 billion)*. Thank you for the opportunity to comment on the amendments to the New Zeal Corporate Governance Code (the Code). We welcome the process undertaken thus far the significant progress within the draft Code. We would like to provide specific feedback on some of the proposed amendments make further comments on ways in which we believe a number of elements could be strengthened under the new Code. We do not have objections to the release of information contained in our submission. Principle Question Response 1 Ethical Stards 1 Ethical Stards 1 2 Board Composition 1. Do stakeholders agree that a more detailed recommendation about ethics is useful? 2. Is there anything further that should be recommended in the code of ethics or discussed in commentary? 1. Are there any further matters in relation to board BMO GAM recognises the importance of a strong, healthy organisational culture ethics play a significant role in ensuring this culture. With regard to the draft code, we would encourage that an issuer s code of ethics be reviewed at least annually. This is a clearer timescale that referring to periodically as is currently the case. Companies should also publish the frequency of training provided to employees. Whether it is through a committee such as the audit committee or a general board review, it is important that the board affirm its responsibility for reviewing internal business ethics systems, ensuring that there is an effective mechanism for the internal reporting of wrongdoing, whether within the company itself, or involving other parties, such as suppliers, customers, contractors or business partners. Particularly given extraterritorial anticorruption legislation such as the US Foreign Corrupt Practices Act the UK Bribery Act there is scope for more rigorous enforcement of bribery corruption. As a result, anticorruption measures should come under particular scrutiny by the board. Business ethics control systems should include employee hotlines other appropriate whistleblowing mechanisms related to financial fraud any other breach of company policies ethical codes. The audit committee may serve as the body to receive whistleblowing reports where no other acceptable body exists. Given this, clearer guidance on ensuring implementation of a code of ethics should be included within the Code with feedback provided to the board. Whilst we consider the topics covered to be appropriate, BMO GAM would like to encourage a *As at 31 July 2016.

2 Performance 2 Board Composition Performance 2 Board Composition Performance 3 Board Committees composition that stakeholders would like covered? 2. Do stakeholders consider a recommendation that directors undertake training to be important? 3. Do stakeholders consider that the board should establish a formal procedure to regularly assess director, board committee performance? 1. Do stakeholders consider it is still appropriate to include a recommendation that directors who are not members of the audit committee, employees, should only attend audit committee meetings at the invitation of the audit further review of the independence requirement for non-executive directors. Strong decisions arise from open direct interplay between boards company executives. It is important to have enough independent nonexecutive directors for an adequate diversity of views to fulfil committee memberships. We expect all widely-held companies to have a majority of independent directors. For companies with controlling shareholders, we encourage companies to have boards that have a majority of independent directors. However, in cases where the controlling or majority shareholder opts to put forward a majority of non-independent directors to the board, there should be a sufficient number of independent non-executives on the board to allow key committees audit, remuneration nomination to operate with independence. For this to be achieved we would, in most cases, expect there to be a minimum onethird fully independent directors on the board. The audit committee provides an important safeguard for shareholders for other stakeholders that rely upon the integrity of the report accounts as a basis for their dealings with the company. Therefore, we would encourage a recommendation in the Code that audit committees consist exclusively of independent non-executive directors. Yes, we view director training as an important part of ensuring that the individual is capable of fulfilling their role. All directors should receive appropriate training when appointed, subsequently on regular occasions, in particular as a consequence of the board evaluation process. We encourage companies to develop director training plans that include educating directors on relevant environmental, social governance matters. Evaluation is an important tool for improving board performance. All boards should implement an evaluation process that considers the effectiveness of the entire board, the contributions made by each member, its systems for interaction between the board company management any areas for improvement. The nominating or governance committee may oversee the evaluation process should report general findings areas for improvement publicly to shareholders. All companies should utilise professional assistance to facilitate evaluations on a periodic basis. Without wishing to micro-manage a company s process, we consider this recommendation to more appropriately sit in the commentary section of the Code. With regard to composition of the audit committee, it should comprise a majority of nonexecutive directors who are considered to be independent. No management should sit on the committee.

3 3 Board Committees committee? Alternatively, is this something that would be better as commentary? 2. Do you consider that the level of overlap between the matory Listing Rules the Code is appropriate? Would submitters prefer some of the other committee related matters to be covered in the NZX Code as opposed to the matory Listing Rules? Note that this would have the impact of making these requirements nonmatory. 1. Do you agree with the proposed recommendations? 2. Do you agree with the proposal to address ESG reporting within commentary? 3. Do you agree NZX should develop its own ESG reporting guidance based on the SSEI s model guidance or alternatively allow for issuers to use the GRI framework? 4. Do you think another framework should be used instead? Whilst the rigour of including governance stards in matory listing rules has its benefits, we consider a comply or explain approach to governance to be the most appropriate. On this basis, we have a general preference of having the governance requirements of a market clearly articulated in one document allowing companies to report against the code on a comply or explain basis. Yes. We would also ask that a provision is included for companies to disclose the proxy results immediately following a shareholder meeting along with information on whether the resolutions passed or failed. In addition to GRI reporting, for industries with a significant environmental impact we would also recommend disclosing to CDP water, forests climate programs as they are widely used by stakeholders globally. The importance of ESG reporting should be a Recommendation. We also support the efforts of the International Integrated Reporting Framework urge companies to consider reporting against its principles. The guidelines apply principles concepts that are focused on bringing greater cohesion efficiency to the reporting process, adopting integrated thinking as a way of breaking down internal silos reducing duplication. It improves the quality of information available to providers of financial capital to enable a more efficient productive allocation of capital. Its focus on value creation, the capitals used by the business to create value over time, contributes towards a more financially stable global economy. Please see responses 2 above 4 below. As an organisation we have found the CDP programs to be extremely beneficial with regard to company disclosure on non-financial reporting. We are also supportive of the aims of the International Integrated Reporting Council to establish integrated reporting thinking within mainstream business enhancing the way organisations think, plan report the story of their business.

4 5 - Remuneration 5 - Remuneration 5. Do you agree that issuers should make key governance documents available to interested investors stakeholders? 1. Do you agree with the proposals outlined above? 2. Do you agree that it is appropriate to require heightened disclosure in respect of CEO remuneration as proposed? Absolutely. As a long-term investor, we aim to build an understing of the fundamental factors shaping the risks opportunities of the companies we invest in. We believe that ESG issues can have a material impact on company performance on the economy as a whole, that robust ESG management by companies is an integral part of good risk management. We are aware that the quantum of pay has become a stalone issue in many markets, has resulted in significant reputational regulatory risks for companies industries where pay levels were seen by regulators, investors general public as excessive insufficiently aligned with performance. We expect boards to demonstrate understing of sensitivity to the views expectations of shareholders other key stakeholders in their main markets when setting executive pay. We expect companies to demonstrate the alignment of their remuneration policy with their overall business strategy planning. Ensuring this is clear in the Code would in our opinion strengthen the principle. Regarding the statement If remuneration consultants are used by an issuer, they should be independent should report directly to the board. We would urge you to consider adding to this statement that if consultants are used they should be disclosed that instead of reporting directly to the board they should report directly to the remuneration committee. Yes, we do agree but would also ask that you consider disclosure of the CEO s service contract including length of notice any termination provision included within. 6 Risk Management 1. Are there any other risk concerns you think should be specifically addressed in commentary? 7 - Auditors 1. Are there any other concerns you think should be specifically addressed in commentary about audit requirements? Aggressive tax strategies, even if structured legally, can pose potentially significant reputational commercial risks for companies. We expect the company s board to ensure that the company s approach to tax policy is both prudent sustainable, to disclose to shareholders that the board is providing appropriate oversight over its tax policy. Companies should provide a suitable amount of information for investors to underst their tax practices associated risks. The auditors performance appointment should be reviewed periodically. Where the same firm remains as auditor for a period of time, there should be a policy of regular rotation of the lead audit partner. We believe that systematic rotation of audit firms is both desirable in the best interest of shareholders. Specifically, we encourage the practice of putting the audit contract out to tender every ten years. We consider it to be desirable over the medium term to broaden the choice of auditors available to companies, hence would encourage

5 8 Shareholder Rights Relations 8 Shareholder Rights Relations 1. Do you have any concerns about principle 8 9 being merged into a single recommendation regarding shareholder interests? 2. Are there any other concerns you think should be specifically addressed in relation to shareholder rights relations? companies actively to consider using the broadest pool of audit firms wherever these can demonstrably meet the required stard of competence global coverage. We expect audit quality to be the main consideration in the selection of the auditor expect that shareholders should be given the opportunity to vote on the appointment payment of auditors. We were comfortable with the separation of items 8 9 to ensure the stakeholder relationships that are important to the future success of a company are managed appropriately. To remove the focus on this area at a Principle level would be to play down the importance of stakeholders increase the risk of failure in this area. Providing disclosure to shareholders of these relationships how they are managed allows a greater understing of the company s operating environment. Channels of shareholder communication should not be limited to the website. The company website should include a point of contact for investors at board level should the normal channels of communication either not be consider appropriate or have failed. Ideally this should be the senior or lead independent director. The board should proactively make itself available for consultation with shareholders on any substantive matter, whether or not it forms the subject of a vote, should, to this end, appoint a senior or lead independent director to fulfil a formal liaison role. This is most important in cases where the CEO also holds the Chairman position, the Chairman has executive responsibilities or was not independent on appointment. Directors should consult shareholders, particularly the company s principal institutional shareholders, prior to seeking approval for resolutions at the annual general meeting (AGM) other meetings where any resolution could be considered contentious or consultation is otherwise deemed appropriate. The NEDs should also seek to establish lines of communication with the principal institutional shareholders, in separate meetings by joining periodically the regular meetings that executive directors hold with institutional shareholders. In particular, we have been advocating that companies adopt a communications forum in which company NEDs can interact with shareholders about matters relating to governance ahead of annual general meetings. The code should set out recommendations on how boards fulfil their responsibilities by acting in the best interests of shareholders. We would greatly appreciate it if the points we have set out above were taken into consideration in the adoption of the final new version of the Corporate Governance Code. We would welcome further discussion with you on both the specific general issues raised in this letter look forward to hearing from you. My contact details are below.

6 Yours sincerely, Daniel Jarman Associate Director Governance Sustainable Investment BMO Global Asset Management Direct: +44 (0)