FMA and RBNZ call for better governance

The Financial Markets Authority – Te Mana Tātai Hokohoko (FMA) and Reserve Bank of New Zealand – Te Pūtea Matua (RBNZ) have released the report of their joint Governance Thematic Review (Report).

What does the Report say?

The Report recommends that boards ensure they have a well-functioning corporate governance framework which sets out the roles and responsibilities of boards, board and committee chairs and their members. The responsibility for ensuring that an effective corporate governance framework is in place rests with the board.

The Report signals that all boards should consider how they perform in six key areas (which required improvement for many of the reviewed entities):

• There should be a formal process for director appointment: entities should have formal and rigorous criteria and processes for appointing and reappointing directors. This should include a formal assessment of director capacity and aim to maintain a majority of independent directors on boards. This applies also to the selection process for board committees and the chair.


• Succession planning needs greater focus: succession planning should be a priority for the chair and should mitigate future composition risks, maintain an appropriate balance of skills, experience and diversity, and ensure continuity in case of unexpected departures.


• Diversity needs to be considered at the board level: while most of the reviewed entities had diversity policies for the organisation, 75% did not have a policy that applied to the board. Boards should consider their own diversity, including board-specific policies and targets (including gender, ethnicity, cultural background, age and skills).


• Conflicts of interest policies should be robust and understood: boards should have formal and robust policies for managing conflicts, including how to evidence appropriate mitigation. While many boards had a conflicts of interest policy, these were not always clearly followed. For example, some interests were recorded in conflicts of interest registers whether or not a conflict existed. Conflicts of interest registers should detail the interest, why it is a conflict, the date the conflict was disclosed and any actions taken to manage the conflict. Conflicts of interest registers should be regularly reviewed.


• Board performance should be monitored and independently evaluated: board, committee, director and CEO performance should be regularly reviewed against comprehensive evaluation criteria. Boards should consider periodic independent evaluations on their performance (at least every three years).


• Board paper quality is important: Boards should set clear expectations on the format, content and length of board papers to ensure they are accurate, relevant and understandable.

You can find a copy of the Report here and the associated FMA media release here.

The Report follows other notable recent developments regarding directors’ duties, including the Companies (Directors’ Duties) Amendment Act and the long-awaited Supreme Court’s Mainzeal decision.

What is governance?

Governance forms one-third of environmental, social and governance (ESG), which is likely front of mind for many boards following the recent amendment to the Companies Act, to explicitly include ESG as an option for consideration in decision-making under the statutory duty to act in good faith and in the best interests of a company. As governance is one of the four pillars under Aotearoa New Zealand Climate Standard 1, entities making mandatory or voluntary climate-related disclosures under the Aotearoa New Zealand Climate Standards will already be in the process of forming governance disclosures.

The Report defines governance as comprising:¹

“…the principles, practices, processes and behaviours that determine how an entity is directed and controlled. Central to this is the role of boards, which are responsible for setting the strategic direction; establishing the tone and culture of the entity through core policies such as remuneration; approving the entity’s risk appetite; and holding management to account.“

The FMA and RBNZ also warn against the risks of poor governance:

“Inadequate governance has often been the root cause of financial entity failures, highlighting the key role effective governance plays in reducing risks to financial stability and promoting fair and transparent markets and public confidence.”

What should boards do?

Read the Report and consider its recommendations. The Report contains the findings from a review of 29 entities regulated by the FMA and RBNZ, including entities across banking, insurance, non-bank deposit taking and fund management. The Report applies to all entities regulated by the FMA and RBNZ and at a high level to all boards. Therefore, we recommend all boards read the Report and assess their own governance frameworks.

Former chairman of the Australian Prudential Regulation Authority, Dr John Laker, independently reviewed the Report. In Dr Laker’s foreword, he noted that there is no “one size fits all” governance framework for financial institutions but that there are “essential foundational elements” in governance frameworks that underpin good board decision-making.

RBNZ Deputy Governor Christian Hawkesby recently delivered a speech to the Institute of Directors to share the outcomes of the Report and to discuss the importance of good governance for financial institutions. In his speech, Mr Hawkesby emphasised that boards should be future focussed. Whether it’s changing economic or political conditions, structural factors (such as climate change), threats (such as cyber-attacks), opportunities or expectations (such as embedding a Te Ao Māori perspective), the environment facing boards is constantly evolving.

The Report also noted that culture and behaviour is likely to become an area of “increasing focus” in the future.

What next?

The Report will inform upcoming policy reviews, including the Standards development for the Deposit Takers Act and review of the Insurance (Prudential Supervision) Act. The FMA may also review its Corporate Governance Handbook once the relevant RBNZ policy has been finalised.

Please get in touch if you have any questions about the Report or good governance generally.