Corporate governance policy

Good corporate governance in general should ensure that the interests of a company's shareholders are properly represented, via the board of directors, in the running of the company. Key areas of interest for shareholders are risk management, the setting of corporate strategy, and ensuring that the strategy is followed through.

Corporate governance arrangements in banks also have wider financial stability implications. In the case where a New Zealand registered bank is a wholly-owned subsidiary, a particular concern is that the interests of the parent entity can conflict with the Reserve Bank's prudential supervision objectives. Reflecting this concern, the Reserve Bank states in its principles for bank registration that it needs to be satisfied that there will be sufficient separation between the bank and its owners. So a key aim of the Reserve Bank's corporate governance policy is to promote an appropriate degree of separation in this way, on a continuing basis as well as when a bank is first registered.

The policy is not meant to be a comprehensive guide to good corporate governance practice. There are many such guides, of which the two most relevant for New Zealand banks are the corporate governance handbook published by the New Zealand Securities Commission in 2004, and the Basel Committee's Principles for enhancing corporate governance.

The policy only applies to New Zealand-incorporated banks. A New Zealand branch of an overseas bank is legally part of that bank, and the bank's corporate governance arrangements are a matter for the home country supervisor. But we do require branches to publish in their disclosure statements some information on those head office arrangements.

The three main components of the policy are specific rules imposed via a bank's conditions of registration, guidelines on the skills and experience expected of the board of directors, and required public disclosure of relevant information, such as details of the individual directors.

Minimum requirements

The standard conditions of registration require a bank to have a board with at least five directors.

A strict majority of the board must be non-executive, and at least half of the board must be independent. A non-executive director is a person who is not employed by the bank, while to be independent, a director must meet certain additional tests designed to ensure that they are free from any business or other association that could materially interfere with the exercise of their independent judgement. At least half of the independent directors on the board must also be ordinarily resident in New Zealand.

The chairperson must be independent. However, if the chairperson is also a director of a parent bank or holding company, they may still qualify as independent, subject to Reserve Bank confirmation, provided that the parent company directorship is the only respect in which they fail the normal tests for independence.

As well as the above requirements focused on board independence, the board must have a separate audit committee (or equivalent), whose mandate must include ensuring the integrity of the bank's financial controls, reporting systems and internal audit standards. The audit committee must have at least three members, all non-executive and the majority independent, and must have a chairperson who is independent and is not the chairperson of the board.

No person can be appointed as a director or as chairperson of a registered bank unless the Reserve Bank has confirmed that it does not object to the appointment. This also applies to certain senior management appointments.

Guidelines

The policy includes guidelines that set out the Reserve Bank's expectations in matters relating to the integrity, competence, and experience of board members in general, and of the audit committee in particular, both collectively and individually.

Public disclosure

All registered banks are required to publish quarterly disclosure statements setting out a range of financial and other information about the bank. Required information relating to corporate governance includes details of each director (including whether they qualify as independent), the make-up of the board audit committee, and the board's policy for handling conflicts of interest.

Overseas bank branches must also disclose this information, in respect of the directors of the bank in its home country of incorporation, and also of the New Zealand Chief Executive Officer.

The disclosure regime also underlines the importance that the Reserve Bank attaches to the role of director by requiring each director to sign an attestation in each quarterly disclosure statement, covering various matters including the bank's compliance with its conditions of registration, and its risk control systems.

Further information

The Reserve Bank's corporate governance policy can be found at Corporate Governance (BS14) (PDF 95KB).

Further discussion of the policy and the rationale for it can be found in the feedback statement and regulatory impact assessment (PDF 123KB).