Corporate governance : a practical handbook [Edition 2.] 9781775471332, 1775471330

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Disclaimer No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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A catalogue record for this book is available from the National Library of New Zealand. ISBN 978-1-77547-133-2 © 2016 CCH New Zealand Limited Published by CCH New Zealand Limited First published July 2012 This edition published April 2016 All rights reserved. No part of this work covered by copyright may be reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying, recording, recording taping, or information retrieval systems) without the written permission of the publisher.

Foreword Good governance is vital for success. A director’s role is pivotal not just for listed companies. Unlisted companies, smaller enterprises, incorporated societies, charities, notfor-profits, Crown entities, local body councils, district health boards, education institutes, school boards and others need sound, ethical governance. Corporate Governance — A Practical Handbook, now in its second edition, provides tools and guidance for all kinds of organisations in the New Zealand and wider context. Recent business and legislative changes ask more of directors. Greater obligations and liabilities under new health and safety legislation, and changes in areas including IT governance, contracting, stakeholder management, performance management and others, demand new responses by directors. These and other new issues are charted in this expanded second edition.

Directors play a critical role, enabling profitable companies, a stronger economy, stable government and better delivery on the goals of organisations of all kinds. This handbook provides practical, contextual advice for the important work of governance in the 21st century. Corporate Governance — A Practical Handbook is a cornerstone resource for everyone responsible for governance activity in New Zealand. Phil O’Reilly Director Iron Duke Partners Ltd Chair Business & Industry Advisory Committee to the OECD

Publisher’s Acknowledgments We wish to thank the following who contributed to and supported this publication: General Manager: Julie Benton Head of Content: Andrew Campbell Editor: Reshma Korah Composition/Graphics Editor: Barbara Hodgson Indexer: Carol Linthwaite Cover Designer: Envisage Design

About the Authors Dr Karen Martyn PhD, MMgmt, MS Ed, BA (General editor) Karen works as a practitioner, consultant, lecturer and researcher. She advises boards and senior management in the areas of board policies, systems and architecture, improving decision-

making and all aspects of the company secretariat function. She is a popular presenter, known for her interactive style. She has lectured for the New Zealand Institute of Directors for eight years, developed and delivered governance training programmes for the Commonwealth Association for Corporate Governance for six years, and developed and lectured undergraduate and MBA papers for Massey University on corporate governance. Sue Barker LLB (Hons) (First class), BCA, CA Sue is director of Sue Barker Charities Law, a boutique law firm based in Wellington, New Zealand, specialising in charities law and public tax law. In 2015, the firm was voted Boutique Charities Law Firm of the Year — New Zealand, at the Corporate LiveWire Legal Awards. Sue is the author of a number of articles and book chapters on charities law issues, and is co-author of the text, The Law and Practice of Charities in New Zealand. Marnus Beylefeld B Acc (Hons), M Com, CA, CFA Marnus is a Principal of Crowe Horwath in Auckland where he practices in the area of corporate finance and forensic accounting. He regularly presents expert witness testimony on matters of valuation, consequential losses and the analysis of financial statements. Bede Carran CA, BA, LLB, BCom Bede is qualified as both a lawyer and a chartered accountant. He has previously worked in the public sector, for corporates and in practice as a chartered accountant. He is involved with the admissions programme for the Chartered

Accountants Australia and New Zealand and previously with the New Zealand Institute of Chartered Accountants as a facilitator and as an author of material. Bede has also held a number of governance positions in both the public and private sectors.

Mark Forman LLB, BCom Mark is a partner in the corporate and commercial team at Minter Ellison Rudd Watts. He specialises in Companies Act 1993 advice, mergers and acquisitions, private equity, commercial contract advice, NZX listing rules/takeovers code advice, securities law transactions, corporate governance advice, shareholder agreements and employee shareholding arrangements. Mark has experience in the United Kingdom and New Zealand. Bill Frecklington LLB, Dip Acc Bill has considerable experience in public sector governance, including nine years with the Commercial Operations Group (formerly CCMAU) at the New Zealand Treasury, advising Cabinet Ministers on board membership and governance issues in Crown companies and entities. Previously he undertook a similar role for the Ministry of Education, providing governance advice and performance monitoring in the tertiary education sector. He is a qualified lawyer, who previously worked in general legal practice and in tax policy. Currently, Bill is working as a consultant in the public sector, along with farming and writing. Bennie Greyling B.Compt, B.Com Acc (Hons), CA(SA) Bennie is a Chartered Accountant with Deloitte and has more than 10 years accounting, assurance and audit experience. He services a portfolio of audit clients which include high profile

and dual listed companies with global operations. Bennie previously also held senior roles in the technical accounting and assurance advisory division of KPMG where he regularly advised clients and audit and accounting professionals on technical matters.

Anna Kominik MSJ, BA, CertJourn, MInstD Anna is a specialist in risk management and strategic communication, providing advice and support to boards and senior management in Australia and New Zealand. A former awardwinning journalist, she has held high profile roles in both the public and private sectors. Anna was a press secretary to two New Zealand Prime Ministers. She has provided public affairs and community engagement advice for a range of major corporate clients, and has provided media support to the Commonwealth Secretary General. She held management positions at the New Zealand Rugby Union and also a leading telecommunications provider. She has a Masters degree from the Medill School of Journalism, Northwestern University, Chicago and sits on three Boards. Adrian Olney LLB (Hons), BA Adrian has extensive commercial litigation experience, particularly in large commercial disputes litigated in the High Court and in arbitration. He is a general commercial litigator but

has particular experience in oil and gas, financial services and telecommunications disputes. Adrian also has experience in contractual disputes, insurance, trade finance, maritime and international trade litigation, criminal prosecutions and regulatory and corporate investigations. He has also advised on Treaty settlement and Māori fisheries issues.

Susan Robson LLB, BA Susan is a lawyer with experience in the public, private and academic sectors, specialising in conflict avoidance and resolution. She is an author of texts about gambling, lawyers and conveyancers, employment and family law, and a legal commentator in the employment jurisdiction. Professor Clive Smallman B.Sc Hon, M.Sc, MBA, MA PhD, FBCS CITP GAICD In March 2016 Clive became President and an Executive Director of Asia Pacific International College (APIC. Clive sits on the advisory boards of three tech start-ups based in Sydney and coaches home based businesses through the Home Base Business Network. A Professor of Management, Clive remains an active researcher and is an Adjunct Professor at Western Sydney. Dr Elizabeth Valentine DIT, MBA Elizabeth is an experienced chief executive, company director, researcher, consultant and online coach. She coaches senior executives and boards in IT governance and digital leadership. She is a sought after consultant and advisor to

public, private and industry sector organisations in New Zealand, Australia and Europe. She is the creator of the internationally renowned IT governance competency standards for boards of directors.

Author Acknowledgments Since the publication of the first edition in 2012, this statement has not changed: Governance is an emerging profession still developing its own evidence-based standards. The rapid rate of development of what governance is (or should be) is evident in the number of legislative amendments. These are only equalled (or exceeded) by the number of prosecutions for governance breaches. Governance is in “white water”. This handbook provides “how to” guidance for directors, trustees and officers governing in New Zealand. Authors have created practical guides for small-to-medium sized enterprise directors (and their advisors) with minimal theory and maximal applicable advice in the form of checklists, templates and other “how to” instructions. The authors are acknowledged for their ability to fulfil this difficult task. The skills and knowledge required to govern effectively are changing rapidly. We added new topics — notably IT governance, annual meetings and the new health and safety requirements — all required in the current and future environment. We significantly modified other topics such as stakeholder management, hiring the CEO, and public sector governance. All other chapters were updated. Polishing the collective talents of the authors into high-quality gems required Reshma Korah, the CCH editor assigned to this second

edition. Reshma served as grammar police, fact checker and ghost writer when required. I am most appreciative of her humour, which kept me up when some challenges might have brought me down. I hope this book meets your needs, which was our goal. Please let us know your experiences and suggestions for further chapters at [email protected]. Wishing you great governance! Karen Martyn, PhD

About the CD-ROM What does the CD-ROM contain? The CD-ROM contains all the templates, checklists and graphics in this book apart from examples which duplicate blank forms. Some templates have been amended for the CD by removing sample data (eg Figure 10.5: Resolutions Register and Figure 10.8: Delegations of Authority). By using the same numbered reference system as the book (eg Figure 1.1, Figure 1.2, etc) as well as the numbered paragraph where each Figure appears in the book, the CD-ROM gives you easy access to the templates, checklists and graphics. See the list of CD-ROM contents below. Using the documents Copy the files off the CD-ROM and onto your hard drive. (Full instructions are given on the CD-ROM.) You can then use and customise the templates, checklists and graphics to suit your own requirements. Note the copyright information at the beginning of this book and the Important Disclaimer that appears on the CD-ROM. eBook purchasers If you have bought the eBook version and would like a CD, please email us at [email protected] with your name and postal address and we will send you one.

Contents of the CD-ROM Details of Figures

Paragraph

Chapter 1 Figure 1.1: Powers that must be specifically stated in Constitution

¶117

Figure 1.2: Powers that may be altered in Constitution

¶117

Figure 1.3: Mandatory rights that cannot be altered in Constitution

¶117

Figure 1.4: Board Charter Template

¶118

Figure 1.5: Disclosure of Governance Practices Template

¶119

Figure 1.6: Board Annual Work Plan

¶120

Chapter 2 Figure 2.1: Interests Register Example

¶205

Figure 2.2: Conflict of Interest Checklist

¶209

Chapter 4 Figure 4.1: Insurance Checklist

¶412

Chapter 5 Figure 5.1: Maximum penalty for each potential charge

¶506

Figure 5.2: Governance Actions Checklist

¶507

Figure 5.3: Workers must be consulted about these Health and Safety matters

¶508

Figure 5.4: Events prescribed in the Health and Safety at Work Act

¶510

Chapter 6 Figure 6.1: Tax Essentials Checklist

¶612

Chapter 7 Figure 7.1: Guidelines for Determining Quantitative Materiality

¶703

Figure 7.2: Determining whether deficiency is significant

¶708

Figure 7.3: Plan to Remedy Example: Financial Statements

¶708

Figure 7.4: Plan to Remedy Example: Human Resources Management

¶708

Figure 7.5: Audit Committee Terms of Reference

¶709

Chapter 8 Figure 8.1: Checklist to consider what documents are needed before annual meeting

¶812

Chapter 9 Figure 9.1: Shortlisting Summary Form

¶902

Figure 9.2: Checklists

¶909

Chapter 10 Figure 10.1: Board Meeting Agenda Example

¶1002

Figure 10.2: Board Meeting Minutes Example

¶1003

Figure 10.3: Decision-making Procedures Policy

¶1004

Figure 10.4: Meeting Rules for a Co-operative, Consensus-Style Board Meeting

¶1005

Figure 10.5: Resolutions Register Example

¶1009

Figure 10.6: Duties of the Chair

¶1010

Figure 10.7: Human Resources Committee Terms of Reference

¶1010

Figure 10.8: Delegations of Authority Example

¶1010

Figure 10.9: Board Code of Conduct

¶1010

Figure 10.10: Board Expenses Policy

¶1010

Figure 10.11: Directors’ Duties

¶1010

Figure 10.12: Director Induction

¶1010

Figure 10.13: Protected Disclosures Policy and Procedures

¶1010

Chapter 11 Figure 11.1: Risk Management Process

¶1104

Figure 11.2: Risk Management Policy Matrix

¶1104

Figure 11.3: Risk Register Example

¶1105

Figure 11.4: Issues Register Example

¶1105

Chapter 12 Figure 12.1: Information required for New Zealand company incorporation

¶1203

Figure 12.2: Information required for overseas company registration (All jurisdictions except Australia)

¶1203

Figure 12.3: Information required for Australian overseas company registration

¶1203

Figure 12.4: Events that must be notified to Registrar of Companies

¶1204

Figure 12.5: Records that must be kept at company’s registered office

¶1207

Chapter 13 Figure 13.1: External Analysis Sheet

¶1305

Figure 13.2: Internal Analysis Sheet

¶1305

Figure 13.3: Business Mission Development Sheet

¶1305

Figure 13.4: Business Mission Statement

¶1305

Figure 13.5: Critical Success Factors Sheet

¶1306

Figure 13.6: Critical Success Factors Rating Chart

¶1306

Figure 13.8: Our Sustainable Competitive Advantage

¶1306

Figure 13.9: Values Enabling Company Success

¶1307

Figure 13.10: Measurable Business Values

¶1307

Figure 13.11: Business Values Statement Example

¶1307

Figure 13.12: Example of Key Drivers Combined

¶1308

Figure 13.13: Marketing Issues Prompts List

¶1309

Figure 13.14: Major Change Opportunity Form

¶1309

Figure 13.15: Key Issues Assessment Chart

¶1309

Figure 13.16: Key Marketing Policies

¶1309

Figure 13.17: Service Issues Prompts List

¶1310

Figure 13.18: Human Resources Issues Prompts List

¶1310

Figure 13.19: Innovation Issues Prompts List

¶1310

Figure 13.20: Information Technology Issues Prompts List

¶1310

Figure 13.21: Finance Issues Prompts List

¶1310

Figure 13.22: Board Strategy Monitoring Guide

¶1312

Chapter 14 Figure 14.1: Technologies and Risk — Social, mobile, analytics, cloud and the internet of things

¶1404

Figure 14.2: Information and Technology risk and key considerations

¶1404

Figure 14.3: IT infrastructure risk and key considerations

¶1404

Figure 14.4: Information security risk

¶1404

Figure 14.5: Board Competency risk

¶1404

Figure 14.6: Example of comments indicating cultural attitudes within boards

¶1405

Figure 14.7: IT project risk

¶1405

Figure 14.8: Business continuity risk

¶1405

Figure 14.9: Reputational risk

¶1405

Figure 14.10: The strategic grid framework (based on Nolan & McFarlan, 2005)

¶1407

Figure 14.11: Support (Defensive) Mode Considerations Checklist

¶1407

Figure 14.12: Factory (Defensive) Mode Considerations Checklist

¶1407

Figure 14.13: Turnaround (Offensive) Mode Considerations Checklist

¶1407

Figure 14.14: Strategic (Offensive) Mode Considerations Checklist

¶1407

Figure 14.15: Board Enterprise Technology Governance Competency Descriptors

¶1407

Chapter 15 Figure 15.1: Principles for Corporate Governance

¶1502

Figure 15.2: Governance Audit and Plan to Remedy Template

¶1503

Figure 15.3: Board Evaluation Template

¶1505

Chapter 16 Figure 16.1: Typical stakeholders and their interests

¶1602

Figure 16.2: Categories of Stakeholders

¶1603

Figure 16.3: Stakeholder Impact Matrix

¶1603

Figure 16.4: Analysing stakeholders

¶1603

Figure 16.5: Basic principles for best practice stakeholder management

¶1603

Figure 16.6 Sample Stakeholder Management Plan

¶1603

Chapter 17 Figure 17.1 Characteristics of most common NFP organisations

¶1703

Figure 17.2: Contents of constitution checklist

¶1707

Figure 17.3: Actions to protect oneself from personal liability

¶1713

Chapter 18 Figure 18.1: Requirements for Removal by Ministers of Public Entity Board Members

¶1806

Figure 18.2: Contents of Board Governance Manuals

¶1808

Appendix A — Checklist for Constitutions of Incorporated Societies

¶1707

Law Commission A New Act for Incorporated Societies (NZLC R129, 2013) (Law Commission report) Exposure Draft: Incorporated Societies Bill — Request for Submissions (hereafter referred to as “Request for Submissions”) Incorporated Societies Bill (the Bill)

¶1706

Chapter 1: DIRECTORS’ CORE DUTIES Editorial information

Karen Martyn

¶101 Introduction This chapter focuses on directors’ duties and obligations as set out in the Companies Act 1993 (ss 131–138 and ss 139–145). In the case of incorporated societies and trusts, it is important to note that where the Incorporated Societies Act 1908 and the Trustee Act 1956 are silent, the law (ie the Companies Act and common law) and company practice (ie how companies do things) may apply. It is highly recommended that society officers and trusts’ trustees be aware of the duties and obligations in the Companies Act for which they may be held accountable. A proven breach of a director’s duties exposes the director (or society officer or trustee) to loss of protection of the corporate structure and to personal liability.

¶102 Companies Act 1993 The Companies Act and New Zealand’s common law (ie case law or precedent, which consists of the decisions made by judges in courts in previous cases) set out the duties and liabilities of directors of a

company (including officers of incorporated societies and trustees of trusts). The Companies Act contains specified duties and obligations for directors, which neither the Incorporated Societies Act nor the Trustee Act addresses.

¶103 Definition of a director The definition of “director” in s 126 of the Companies Act includes not only named directors (ie directors formally appointed to the office) but also those acting in this capacity by exercising accustomed board powers. Thus individuals who are not formally appointed or named as a director can still be regarded as a director under s 126 and can be held liable for duties owed to the company. This is important because directors have liabilities and duties that require conscious effort and actions to fulfil. Passive directors (and those deemed to be directors under s 126) risk their reputation and personal assets through failure to act.

¶104 Fiduciaries Directors, like lawyers, doctors, accountants and other professionals, are fiduciaries who, under a legally defined fiduciary relationship, must put the interests of their client (or patient) before their own. It is important that directors recognise that their fiduciary duties are owed to the entity (whether it be a company, society or trust) and not to individual shareholders, society members, beneficiaries or even other directors. When a director commits a wrong against a company, the company can bring a claim against the director (known as a derivative action). This happens when a shareholder gains the authority (through a majority vote) at a shareholders’ meeting to bring an action against a director in the company’s name. The company thus pays for its legal representation and is the plaintiff in proceedings against the director. Directors are fiduciaries to the company. Therefore, when directors act inappropriately, it is the company that takes action against them. Because directors have a high degree of control over the affairs of the

company, they in turn owe the company onerous duties. Sections 131–138 of the Companies Act cover directors’ duties that are mostly derived from their fiduciary obligations.

¶105 Section 131: Duty to act in good faith and in best interests of company Acting in good faith means having a sincere belief or motive that one is doing the right thing, without any malice or desire to defraud others. It also means avoiding acts that advance a director’s own interests at the expense of the company’s (ie avoiding conflicts of interest). The standard for this duty is personal and subjective — as long as the director sincerely believes that the action is in the best interests of the company, he or she is protected for that action. The standard is not what an “ordinary” or “reasonable” director might do (ie an impersonal, objective standard), but rather what the director believed. This enables directors to use their business judgment without fear that their decisions will be subjected to the scrutiny of hindsight. The exception to the requirement to act in the company’s best interests is if the company is a joint venture company or a whollyowned subsidiary of a parent company. A director may act in the best interests of his or her appointing shareholder or parent company if that action is expressly permitted in the joint venture company’s Constitution. Knowledge of the terms of the Constitution is critical for directors’ thorough understanding of their duties (see ¶108). Duty to act in good faith and the best interests of company Do you honestly and sincerely believe that the decision or action is best for the company and that you have no conflict of interest? See chapter 3 for more information on conflicts of interest.

¶106 Section 132: Exercise of powers in relation to

employees This section allows directors “to make provision for the benefit of employees of the company in connection with the company ceasing to carry on the whole or part of its business”. It specifically excludes directors who are employees and includes subsidiaries of a company. This power would be useful where a small business has long-serving employees who are not shareholders and the board thinks it is fair and proper to provide for payment upon full or partial closure of the business. Exercise of powers in relation to employees Does the board want to make fair provisions for employees who will be affected by the closure of the business or the employees’ part of it?

¶107 Section 133: Duty to exercise powers for proper purpose This is the least clearly defined duty. It prohibits directors from using their powers for purposes other than what is intended for the office (ie it forbids the use of directors’ powers for an improper motive). In essence, it means directors must only use their powers for the purpose for which they were granted. The often-cited example of misuse of directors’ powers is of directors who issue shares solely for the purpose of diluting a particular shareholder’s shareholding (and influence on company decisions through voting power) or to defeat a takeover bid. While the actions may arguably be in the best interests of the company as a whole, and may even be supported by the other shareholders, this would be an improper motive for issuing shares (the proper motive would be to raise funds for the company) and thus the directors would be using their powers for an improper purpose. There are few other clear examples of directors using their powers for an improper purpose but that does not mean that the courts would not interpret other actions as improper use of a director’s powers.

Duty to exercise powers for a proper purpose Are you using the power for the proper purpose for which it was intended?

¶108 Section 134: Duty to comply with Companies Act and Constitution Directors are specifically charged with complying with the Companies Act and the particular company’s Constitution as well as ensuring that the company complies with both. Failure to comply with the Act potentially results in criminal liability. Two common examples of breaching the Act are failure to keep a share register (s 87(1)) and failure to prepare and send an annual report to shareholders (ss 208 and 209). Failure to fulfil either of these duties means the Act is not being complied with and the director is liable under s 374 (which outlines the penalties that may be imposed on directors in cases of failure by board or company to comply with the Act). This breach is actionable by the company against the director through a derivative action (ie claim by company for wrongful action of director, see ¶104). Such breaches of the Act constitute a criminal offence and expose directors to potential civil liability. Duty to comply with Companies Act and Constitution Are you aware of the processes and/or procedures in place to ensure that the company is complying with all sections of the Companies Act? Are you aware of the processes and/or procedures in place to ensure that the company is complying with all parts of its Constitution? Do you know that you/the board are acting in compliance with the company’s Constitution? (This requires you to know the company’s

Constitution or at least be familiar with its contents.)

¶109 Section 135: Reckless trading Although s 135 (prohibiting reckless trading) and s 136 (duty in relation to obligations) are primarily aimed at protecting creditors, the duties are owed to the company. This is supported by the precedent that although a creditor may bring the action against directors under s 301 (which allows creditors to apply to the court for repayment or restoration or compensation by the director), the repayment or remedy is payable only to the company, not to the creditor. A director must not agree to, cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors. This duty is aimed at preventing conduct by the directors which could jeopardise the company’s solvency and leave creditors unpaid. It is meant to incentivise directors to cease trading when they know (or should reasonably know) that the debts they are incurring would go unpaid. Unlike the best interests duty (which is personal and subjective, see ¶105), the director’s personal opinion as to the company’s ability to continue trading is irrelevant. The court looks to an objective, reasonable standard: “Was there something in the financial position of this company which would have drawn the attention of an ordinary prudent director to the real possibility not so slight as to be a negligible risk, that his continuing to carry on the business of the company would cause the kind of serious loss to creditors of the company which sec 320(1)(b) was intended to prevent?”1. The passive director who “allows” reckless trading (when he or she has a duty to avoid it) and has little or no actual knowledge of the company business (because of abdicating his or her responsibilities to more active members of the board) is just as liable as the active directors under the Companies Act. A quick and dirty test is to see whether the company’s liabilities exceed its assets. If they do, the directors should investigate and find

out what could (or could not) be paid if the company ceased trading immediately. You must differentiate between planned income and actual income. For example, the state-owned enterprise, Terralink Ltd, New Zealand’s land and property information provider, accrued all hours worked on a job as future income although the contract was for a fixed amount, which left the company in financial deficit. Reckless trading A director must not allow (even passively) the business to be carried out in such a manner as to create a substantial risk of serious loss to creditors. What processes or procedures can you demonstrate to support your prevention of this? Footnotes 1.

Thompson v Innes (1985) 2 NZCLC 99,463 at 99,472.

¶110 Section 136: Duty in relation to obligations This duty says that a director must not agree to the company incurring an obligation unless he or she believes at the time the obligation is incurred and “on reasonable grounds that the company will be able to perform the obligations when required to do so”.2. Thus, a director must honestly believe on reasonable grounds that the company will be able to pay the debt when it falls due for payment as well as all its other debts (including future and contingent debts). This duty applies to such transactions as the company guaranteeing a loan. It has been argued that this duty prevents directors from taking commercial risks. As long as the directors’ decision is based on reasonable inquiries, research or information, it is less likely to be

questioned later. Always ensure a “paper trail” is created as evidence that the directors have performed their duties. Duty in relation to obligations At the time of incurring company obligations, what information did you obtain (and record) to provide assurance that the company can fulfil its obligations when they fall due? Footnotes 2.

Re Hilltop Group Ltd (in liq); Lawrence v Jacobson (2001) 9 NZCLC 262,477 at [32].

¶111 Section 137: Director’s duty of care Directors are required, when exercising powers or performing duties, to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances, taking into account: • the nature of the company • the nature of the decision • the position of the director, and • the nature of responsibilities undertaken by him or her. Therefore, it seems each director is judged on his or her role in each decision made. If a director is appointed to a specific task or takes on a specific responsibility, he or she may be liable if he or she does not bring the required skills to that task. However, because under s 138 (see ¶112) a director may rely on professional or expert advice from reliable, competent employees, professional advisers and experts, and even other directors, the prudent director should obtain (and

document) the advice received to avoid potential liability under this section. Examples of breaches of this duty of care include: • directors who act before becoming fully acquainted with the company’s affairs • directors who trust employees with the management of the company and do not make sufficient inquiries to justify the trust or who trust employees when such reliance is unwarranted • directors who cause their company to make loans to another company that is connected to a director of the first company, with no possible benefit to the first company, and • directors who sign blank cheques and abdicate governance of the company’s business to other directors. It is clearly established that directors who have little involvement in direction of the company are still liable when difficulties arise. The duty of care makes this explicit. Director’s duty of care Can you demonstrate that you are fully acquainted with the company’s affairs when making decisions? Have you made sufficient inquiries before acting, or delegating management to others, or relying on their advice? Do you have the skills necessary to fulfil your responsibilities and make decisions, or have you relied on expert advice that is reliable? Do your actions demonstrate the care required to fulfil your fiduciary duty to the company?

¶112 Section 138: Use of information and advice Section 138 enables directors to rely on reports, statements, financial data and professional/expert advice given to them by: • an employee of the company who is believed by the director (reasonably) to be reliable and competent in the matters concerned • a professional adviser/expert on matters within his or her competence, or • another director or a committee of the board upon which the director does not serve. To rely on the information and advice provided by the sources listed above, directors must act in good faith, make proper inquiries where circumstances indicate a need for this, and have no knowledge that their reliance is unreasonable.

Example The so-called “Feltex Five”3. (five directors of Feltex Carpets Ltd) were charged with failing to disclose in the company’s half-year results that Feltex had breached a financial covenant with the ANZ bank and with failing to classify the ANZ facility as a current liability when the effect of the breach was that the ANZ could call in the loan. The Court’s decision was to reaffirm directors’ rights to trust and rely on expert advice so long as such trust is warranted and there are no reasons to suspect that it may be misplaced.

Use of information and advice Have you acted in good faith, relied on expert

or other acceptable advice, and had no reason to question reliance on that advice? Footnotes 3.

Ministry of Economic Development v Feeney (2010) 10 NZCLC 264,715 (DC).

¶113 Sections 139–144: Transactions involving selfinterest It is incumbent upon a fiduciary to avoid any conflict of interest. A director is defined as “interested” (and therefore has a conflict of interest) in a transaction to which the company is a party, if the director (or the director’s company, parent, child or spouse) will or may derive a material financial benefit from that transaction. Given the duty to avoid conflicts of interest, many regimes (such as Australia) have prohibited directors from having any interest in a transaction or using any information gained by virtue of their position. This simplifies matters and clearly defines what is and is not acceptable behaviour. New Zealand takes a softer stance; the legislation allows conflicts provided they are “managed”. Management of conflicts involves declaring the director’s interest in the company’s Interests Register, and disclosing to the board (if there is more than one director) the nature, extent and (if known) monetary value of the interest. Section 144 allows interested directors to attend the meeting where the matter is discussed, be counted in the quorum, sign documents relating to the transaction and even vote (subject to the Constitution) “as if the director were not interested in the transaction”. Needless to say this is not viewed as “best practice” in the global governance community.

Companies with shareholders should disclose interests to the shareholders in a timely manner (do not leave it until the annual report) as s 141 allows a company to avoid a transaction in which a director of the company is interested for up to three months after the transaction is disclosed to all shareholders, unless it can be shown that the company received fair value. Legislation governing societies and trusts (eg Incorporated Societies Act, Charitable Trusts Act 1957 and Trustee Act) does not require disclosure of conflicts of interest but all entities receiving donations or public moneys (ie government funding of any kind) should make this a requirement and publish the Interests Register to demonstrate accountability and transparency. Lastly, although the Companies Act allows interested directors full use of their powers relating to transactions they are interested in, it is recommended that all companies, societies and trusts forbid interested directors from participating in matters in which they have an interest, through appropriate provisions in their constitutions, rules or trust deeds. What is legally permissible is not necessarily morally acceptable or good practice. See chapter 3 for more information on conflicts of interest. Transactions involving self-interest Have you disclosed all your interests (not just financial) in the Interests Register? Have you recorded in the Minutes the board’s knowledge of your conflict(s) and its explicit authorisation for your participation (or not) in decisions related to your conflicts? If you have shareholders (even family members), have you disclosed your conflicts to them in a timely manner? If you have ongoing conflicts, consider whether you should remain on the board.

¶114 Section 145: Use of company information Directors have a position of power and a relationship of confidence with the company. This imposes duties and obligations on the director not to disclose or use confidential information without the company’s consent. As with directors’ interests, directors have traditionally been prohibited from using company property (including confidential information and trade secrets) for their own purposes. However, once again this blanket prohibition seems to have been abandoned in New Zealand in favour of regulating the use of information by directors. Company information is anything raised or referred to, in the course of one’s governance role, about the company and even its declined opportunities. Examples of company information include proprietary information, trade secrets, technical know-how, customers’ details, internal financial information, feasibility studies, ongoing transactions between the company and its clients, and opportunities the company considers and rejects. An example of a breach of this duty is when a director takes up an opportunity that the company declined, without the company’s explicit permission. The duty imposed on directors who possess confidential information prohibits disclosure of that information to any person, making use of it or acting on it, unless: • the disclosure is made solely for company purposes • the disclosure is required by law, or • the disclosure is made by a nominee director to his or her appointer, provided this is not prohibited by the board. Directors may disclose confidential information if the following conditions are met: • the director has entered particulars of the disclosure in the Interests Register

• the board has authorised the director to make disclosure, and • the disclosure will not prejudice the company. Use of company information If you are taking up an opportunity that you became aware of through your position as a director, have you received the company’s explicit permission to do so? If you are disclosing confidential company information, are you doing so: • for company purposes • because it is required by law • because you have company authority to do so, or • because you are not prohibited from doing so by the board or by your duty to the company?

¶115 More duties owed by directors Many other duties a director owes directly to shareholders, liquidators and the company are not covered in detail here but are worth listing. They include: • supervising the share register • being liable for the debts of the company if the director participates in the management of a company when he or she has been disqualified (by the court or the Registrar of Companies) • possibly repaying or restoring money or property, or contributing an amount to the assets of the company by way of compensation if a director has misapplied company money or property, or has been guilty of negligence, default or breach of trust

• not making a distribution to shareholders when the company is insolvent (thus depriving creditors of payment) • not trading shares using inside information, and • not receiving an unauthorised payment or contracting for unauthorised insurance if the director is unable to prove these actions are fair to the company.

¶116 Penalties and more obligations under other legislation There are more than 100 sections of the Companies Act of which a breach can constitute a criminal offence. Many of these sections impose criminal liability on the directors personally as well as on the company. Penalties are relatively small (up to $10,000), although more serious offences can carry up to five years’ imprisonment or a fine of up to $200,000. Certain breaches have been criminalised, such as directors acting in bad faith and not in the best interests of the company, with knowledge that this will cause serious loss to the company and directors dishonestly incurring debt for an insolvent company, or when they had knowledge that the company would become insolvent. Other statutes, too, can impose personal liability on directors, who need to know both the company’s and their own obligations under this legislation. Other Acts that impose personal liability on directors include (but are not limited to): • Financial Reporting Act 1993 • Fair Trading Act 1986 • Health and Safety in Employment Act 1992 • Resource Management Act 1991 • Commerce Act 1986

• Privacy Act 1993 • Human Rights Act 1993, and • Building Act 2004. Directors who cause the company to act in contravention of any statute would be acting for an improper purpose or not acting in the best interests of the company. Decisions must be documented When making any decision, the board should ensure that it has left a “paper trail”, detailing not only its decision, but also its reasons (citing expert advice, information, reports and other material used as the basis for the decision). This documentation will go far towards showing that directors acted on “reasonable grounds”.

¶117 Constitution checklists Company law (this applies to society and trust law as well) is about the balance of power between directors who manage the company (as the board) and shareholders who own the shares in the company and make decisions at shareholders’ meetings. Section 128 of the Companies Act states that the business and affairs of the company must be managed by, or under the direction or supervision of, the board. The schedules of the Companies Act are the default Constitution of every company that does not file its own Constitution. The Act specifies that certain powers or rights must be stated in the Constitution to be allowed. Probably the most important of these is the right to take out insurance and indemnify directors, employees and related companies. See chapter 2 for more information on insurance and indemnity. To ensure that your entity can carry out certain functions, check the

following list of powers that must be specifically stated in the Constitution to be allowed (Figure 1.1). If you discover that your Constitution does not specify these powers, you will need to propose them as changes to the Constitution for approval at a shareholders’ meeting. Remember that changing the Constitution (or rules for a society) usually requires a 75% or more majority vote — check your Constitution for the exact procedures for change in your entity. Figure 1.1: Powers that must be specifically stated in Constitution Powers allowed only if provided for in your Constitution

Relevant section in Companies Act 1993

Company’s power to acquire its own shares

s 59

Company’s power to issue redeemable shares

s 69(1)

Company’s right to have two share registers

s 88

Company’s right to have insurance and s 162 indemnities for directors, employees and related companies Some shareholders of a company or members of a society may wish to extend or restrict the board’s powers. The table below (Figure 1.2) lists six powers that can be altered to suit by stating the extent of the power in the Constitution (or rules). Figure 1.2: Powers Which May Be Altered in Constitution Powers that may be extended or restricted through your Constitution

Relevant section in Companies Act 1993

Power of the board to change the company name

s 23(1)

Right to transfer shares

s 84(1)

Requirement that shareholders must pass ordinary resolutions for all matters except those specified as requiring special resolution

ss 105 and 106

Power to extend or restrict powers of the s 128 board is limited Power to alter remuneration and other benefits of directors

s 161

Power to issue shares in lieu of dividends

s 54

Remember that a Constitution (or rules) can only be altered by a special resolution (75% of the voting shares or more if so required in the Constitution). There are also a few mandatory rights which cannot be altered by the Constitution, as listed in Figure 1.3 below. Figure 1.3: Mandatory Rights Which Cannot Be Altered in Constitution Provisions that cannot be altered in your Constitution

Relevant section in Companies Act 1993

Requirement to have at least one shareholder, director and a company name

s 10

Requirement for a special resolution (75% or more) to change the Constitution, approve a major transaction or amalgamation, or put the company into liquidation

s 106

Requirement to pass the solvency test before authorising a distribution

s 52

¶118 Board Charter — what the board does and how it

does it The Board Charter states what is expected of the board. It is effectively a fundamental policy clearly stating how the board will conduct itself and perform its governance work responsibilities. The board may be held accountable for what is in the charter. The Board Charter should describe the role of the board, including: • the roles of the chair, deputy chair, board or company secretary, and standing committees • meeting procedures the board follows, including how often the board meets and how meetings are run • board composition guidelines • remuneration rules for directors • board evaluation (see chapter 7 for more information on board evaluation and governance audit) • the board’s relationship to the chief executive officer (CEO) with a clear division of duties, and • reference to other policies and procedures (eg the Board Annual Work Plan, see ¶120). Excerpts from the Board Charter are often published on the company’s website under disclosure of governance practices and in the annual report to shareholders. The Board Charter template below (Figure 1.4) may be customised to suit the circumstances of your company (or society or trust). Figure 1.4: Board Charter Template

[NAME OF COMPANY]

A CHARTER FOR THE BOARD Part 1 — Interpretation 1.1 In this Charter (“Charter”): “Act” means the Companies Act 1993 “Board” means the board of directors of [name of company] “Business” means the business of [name of company] “CEO” means the chief executive officer of [name of company] “The chair” means the chair of the board and is used in a gender neutral sense “Organisation” means [name of company] “Organisation goals” means [name of company]’s goals as set out in Part 2 “Deputy chair” means the deputy chair of the board and is used in a gender neutral sense “Management” means the management personnel of [name of company] “Management limitations” means the limitations on the actions of management as set out in paragraph 4.3 “Directors” means directors of the board “Secretary” means the board secretary or the person normally exercising the functions of a board secretary “Shareholders” means the registered shareholders of [name of company]. Part 2 — Organisation Goals 2.1 General 2.1.1 The purpose of [name of company] is [purpose]. 2.1.2 The capital and resources of [name of company] will be allocated to those assets and activities which will enable it to achieve [name of company]’s goals in a manner best serving the

interests of the shareholders as a whole. Part 3 — Board Governance Process 3.1 Role of the Board 3.1.1 The role of the board is to effectively represent and promote the interests of shareholders with a view to adding long-term value to [name of company]. 3.1.2 Having regard to its role, the board will direct and supervise the management of the business and affairs of [name of company] including, in particular: • Ensuring that [name of company]’s goals are clearly established, and that strategies are in place for achieving them (such strategies being expected to originate, in the first instance, from management) • Establishing policies for strengthening the performance of [name of company] including ensuring management is proactively seeking to build the business through innovation, initiative, technology, new services/products and the development of its business capital • Monitoring the performance of management • Appointing the CEO, setting and reviewing the terms of the CEO’s employment contract and, where necessary, termination of the CEO’s employment • Deciding on whatever steps are necessary to protect [name of company]’s financial position and the ability to meet its debts and other obligations when they fall due, and ensuring that such steps are taken • Ensuring that [name of company]’s financial statements are true and fair and otherwise conform with law • Ensuring that [name of company] adheres to high standards of ethics and corporate behaviour, and

• Ensuring that [name of company] has appropriate risk management/regulatory compliance policies in place. 3.1.3 In the normal course of events, day-to-day management of [name of company] will be in the hands of management. 3.1.4 The board will satisfy itself that [name of company] is achieving its goals. 3.2 The Board’s Relationship with Shareholders 3.2.1 The board will use its best endeavours to familiarise itself with issues of concern to shareholders. 3.2.2 The board will regularly evaluate economic, political, social and legal issues and any other relevant external matters that may influence or affect the development of the business or the interests of shareholders and, if appropriate, will take outside expert advice on these matters. 3.3 Board Procedures 3.3.1 The conduct of directors will be consistent with their duties and responsibilities to [name of company] and to shareholders. The board will be disciplined in carrying out its role, with the emphasis on strategic issues and policy. Directors will always act within any limitations imposed by the board on its activities. 3.3.2 Directors will use their best endeavours to attend board meetings and to prepare thoroughly. Directors are expected to participate fully, frankly and constructively in board discussions and other activities and to bring the benefit of their particular knowledge, skills and abilities to the board table. Directors unable to attend a meeting will advise the chair at the earliest date possible and confirm in writing to the secretary. 3.3.3 Board discussions will be open and constructive, recognising that genuinely held differences of opinion could, in such circumstances, bring greater clarity and lead to better decisions. The chair will, nonetheless, seek a consensus in the board and will always call for a vote. All discussions and their record will remain confidential unless otherwise required by law.

Subject to legal or regulatory requirements, the board will decide the manner and timing of the publication of its decisions. 3.3.4 The CEO will attend all board meetings to discharge his or her responsibilities. However, the board should schedule at every meeting time to discuss matters without management’s presence and during these times the CEO will absent himself/herself from that portion of the meeting. 3.3.5 The board has sole authority over its agenda and exercises this authority through the chair. Any director may, through the chair, request the addition of an item to the agenda. The chair, in consultation with the CEO, will set the agenda. 3.3.6 The board will normally hold meetings in each month of the year except January and will hold additional meetings as the occasion requires. At each meeting [name of company]’s Interests Register will be updated as necessary and the board will consider: • an operational report from the CEO • financial reports from the accountant • reports on the activities in each of [name of company]’s functional areas • specific proposals for capital expenditure and acquisitions, and • major issues and opportunities for [name of company]. In addition, the board will annually, as per the Board Annual Work Plan: • review organisation goals • review the strategies for achieving [name of company]’s goals • approve the annual budget

• approve the annual and half-yearly financial statements, reports to shareholders and public announcements • approve the annual report • review the board composition, structure and succession • review [name of company]’s audit requirements • review the performance of, necessity for and composition of board committees • undertake board and individual director evaluations • review directors’ remuneration • review the CEO’s performance and remuneration • review remuneration policies and practices in general, including superannuation and incentive schemes for management • review risk assessment policies and controls, including insurance covers and compliance with legal and regulatory requirements • review [name of company]’s Code of Conduct and ethical standards • review shareholder, supplier and critical stakeholder relations • review donations and sponsorships, and • settle the following year’s Board Annual Work Plan. 3.3.7 Directors are entitled to have access, at all reasonable times, to all relevant organisational information and to management.

3.3.8 Directors are expected to strictly observe the Privacy Act 1993 and Companies Act 1993 provisions applicable to the use and confidentiality of organisational and individual information. 3.3.9 In making policy, the board will not reach specific decisions unless it has considered the context in which the policies will operate, and will utilise the rational problem-solving methodology to ensure robust decision making. 3.4 The Chair and Deputy Chair 3.4.1 Each year the board will appoint from among the directors, a chair and deputy chair. 3.4.2 The deputy chair will deputise for the chair in his or her absence or at his or her request. 3.4.3 The chair is responsible for representing the board to shareholders. 3.4.4 The chair is responsible for ensuring the integrity and effectiveness of the governance process of the board as set out in this Part 3. 3.4.5 The chair is responsible for maintaining regular dialogue with the CEO over all operational matters and will consult with the remainder of the board promptly over any matter that gives him or her cause for major concern. 3.4.6 The chair will act as facilitator at meetings of the board to ensure that no director dominates discussion, that appropriate discussion takes place and that relevant opinion among directors is forthcoming. The chair will ensure that discussions result in logical and understandable outcomes. 3.5 Board Committees 3.5.1 Board committees will be formed only when it is efficient or necessary to facilitate efficient decision making. 3.5.2 Board committees will observe the same rules of conduct and procedure as the board unless the board determines otherwise.

3.5.3 Board committees will only speak or act for the board when so authorised. The authority conferred on a board committee will not derogate from the authority delegated to the CEO. 3.5.4 The board has two standing committees, namely the Finance and Audit Committee and the Human Resources and Governance Committee. Other committees are formed for specific purposes and disbanded as required. The purposes and membership of the standing committees are as follows: • The Finance and Audit Committee consists of three directors. The committee provides a forum for the effective communication between the board and the external and internal auditors. The Finance and Audit Committee reviews the annual and half-yearly financial statements prior to their approval by the board, the effectiveness of management information systems and systems of internal control, and the efficiency and effectiveness of the external and internal functions. • The Human Resources and Governance Committee consists of three directors. The committee reviews the remuneration packages of all directors and the CEO, and makes recommendations to the board annually. The Human Resources and Governance Committee reviews the composition of the board annually and makes recommendations to the board where considered necessary to ensure the directors of the board comprise an appropriate mix of skills and experience. When necessary, the Human Resources and Governance Committee seeks assistance from external advisers in connection with the suitability of applicants for board membership. 3.6 Board Composition and Mix 3.6.1 The composition of the board will reflect the duties and responsibilities it is to discharge and perform as representative of the interests of members, and in setting [name of company]’s strategy and seeing that it is implemented.

3.6.2 Generally, the qualifications for board membership are the ability and intelligence to make sensible business decisions and recommendations, an entrepreneurial talent for contributing to the creation of member value, the ability to see the wider picture, the ability to ask the hard questions, preferably a mix of diverse experience in the industry sector among elected directors, high ethical standards, sound practical sense, and a total commitment to furthering the interests of shareholders and the achievement of [name of company]’s goals. 3.6.3 Appointed directors will be active in areas that enable them to relate to the strategies of [name of company] and to make a meaningful contribution to the board’s deliberations. They will be independent of management and free from any business or other relationship that could materially interfere with the exercise of their independent judgment. 3.6.4 The size of the board will be such that the common purpose, involvement, participation, harmony, and sense of responsibility of the directors are not jeopardised. It must be large enough to ensure a range of knowledge, views and experience. Generally, the number of directors will be between six and eight, of whom at least half will be appointed. 3.6.5 Subject to any limitations imposed by members, it is anticipated that all directors will hold office initially for three years following their first appointment (or, if appointed by the board between annual meetings, from the date of the meeting next following the appointment), subject to any obligation to retire by rotation in accordance with [name of company]’s Constitution. It is not generally expected that any director would hold office for more than six years or be nominated for more than two consecutive terms, whichever is longer. 3.6.6 [For societies] In the event of an elected director’s membership with [name of society] terminating for whatever reason, the director is expected to resign from the board, although the board may, if it considers it appropriate, and subject to members’ approval where necessary, reappoint the director as

appointed director where a vacancy exists. 3.7 Induction of New Directors 3.7.1 Potential directors are encouraged to carry out “due diligence” on [name of company] before accepting an appointment to the board. 3.7.2 On their first appointment, directors will have the benefit of an induction programme aimed at deepening their understanding of [name of company] and the business and the environment and the markets in which [name of company] operates. As part of the programme, directors will receive a folder of essential board and organisation information and will meet key management. 3.7.3 Directors are expected to keep themselves abreast of changes and trends in the business and in [name of company]’s environment and markets, and to keep abreast of changes and trends in the economic, political, social and legal climate generally. 3.8 Directors’ Remuneration 3.8.1 The shareholders will determine the level of remuneration paid to directors through a vote at the annual meeting. 3.8.2 Directors will be paid a basic fee and may be paid an extra fee as chair and members of a committee of the board. The chair and deputy chair will be paid a level of fees appropriate to their offices. For the chair this will generally be 200% and for the deputy chair 125% of the basic fee paid to other directors. The board will review remuneration at least two-yearly after taking independent advice and make recommendations to the shareholders. 3.9 Provision of Business or Professional Services by Directors 3.9.1 Because a conflict of interest (actual or perceived) may be created, directors should not, generally, provide business or professional services of an ongoing nature to [name of company]. 3.9.2 Notwithstanding the general rule, [name of company] is at liberty to:

• for the purpose of a special assignment, engage the services of any director having special expertise in the particular field, or • engage the services of another director of a director’s organisation as long as the terms of engagement are competitive, are clearly recorded and all legal requirements for disclosure of the engagement are properly observed. 3.10 Other Board Appointments 3.10.1 Any director is, while holding office, at liberty to accept appointments to the boards of other organisations so long as the appointment is not in conflict with the business and does not detrimentally affect the director’s performance as a director. All other appointments must first be discussed with the chair before being accepted. 3.11 Independent Professional Advice 3.11.1 Any director is entitled to obtain independent professional advice relating to the affairs of [name of company] or to his or her other responsibilities as a director of [name of company]. 3.11.2 If a director considers such advice is necessary, the director shall first discuss it with the chair and, after agreeing the terms, shall be free to proceed. 3.11.3 Subject to the prior approval of the chair, the cost of the advice will be reimbursed by [name of company] but the director will ensure, as far as practical, that the cost is reasonable. All such advice will be made available to all directors and the CEO unless they are the subject of the advice. 3.12 Board and Director Evaluations 3.12.1 The board will, each year, critically evaluate its own performance and its own processes and procedures to ensure that they are not unduly complex and are designed to assist the board in effectively fulfilling its role.

3.12.2 Each year, the board’s Human Resources and Governance Committee determines questions to be asked of directors for evaluating the performance of the board as well as other directors individually, including the chair. Each director answers the questions in writing, and the responses are collated by an independent third party who then discusses the results with each director and the board. The third party may produce, if asked, a written summary report of the findings and make recommendations for addressing deficiencies and improving director and board performance. 3.13 Indemnities and Insurance 3.13.1 [Name of company] will provide directors with, and will the pay the premiums for, indemnity and insurance cover while acting in their capacity as directors, to the fullest extent permitted by the Act. 3.14 The Board Secretary 3.14.1 The appointment of a board secretary may be made on the recommendation of the CEO and must be approved by the board. 3.14.2 The secretary is responsible for ensuring that board procedures are followed, that the applicable rules and regulations for the conduct of the affairs of the board are complied with and for all matters associated with the maintenance of the board or otherwise required for its efficient operation. 3.14.3 All directors, particularly the chair, have access to the advice and services of the secretary for the purposes of the board’s affairs and the business of [name of company]. Part 4 — Board—Management Relationship 4.1 Position of CEO 4.1.1 The board will link [name of company]’s governance and management functions through the CEO. 4.1.2 All board authority conferred on management is delegated through the CEO so that the authority and accountability of management is considered to be the authority and accountability

of the CEO so far as the board is concerned. The board must agree to levels of sub-delegation immediately below the CEO. 4.1.3 The board will agree with the CEO to achieve specific results directed towards [name of company]’s goals. This will usually take the form of an annual performance contract under which the CEO is authorised to make any decision and take any action within the management limitations, directed at achieving [name of company]’s goals. 4.1.4 Between board meetings, the chair maintains an informal link between the board and the CEO, expects to be kept informed by the CEO on all important matters, and is available to the CEO to provide counsel and advice where appropriate. 4.1.5 Only decisions of the board acting as a body are binding on the CEO. Decisions or instructions of individual directors, officers or committees are not binding except in those instances where specific authorisation is given by the board. Instances of individual directors giving unauthorised instructions or taking such decisions shall constitute a serious breach of a director’s duties and be subject to termination of appointment. 4.2 Accountability of CEO to Board 4.2.1 The CEO, in association with the chair, is accountable to the board for the achievement of [name of company]’s goals, and the CEO is accountable for the observance of the management limitations. 4.2.2 At each of its normal monthly meetings, the board should expect to receive from or through the CEO: • the operational and other reports and proposals referred to in paragraph 3.3.6, and • such assurances as the board considers necessary to confirm that the management limitations are being observed. 4.3 Management Limitations 4.3.1 The CEO is expected to act within all specific authorities

delegated to him or her by the board. 4.3.2 The CEO is expected to not cause or permit any practice, activity or decision that is contrary to commonly accepted good business practice or professional ethics. 4.3.3 In allocating the capital and resources of [name of company], the CEO is expected to adhere to [name of company]’s goals. 4.3.4 The CEO is expected to not cause or permit any action without taking into account the health, safety, environmental and political consequences and their effect on long-term member value. 4.3.5 In financing [name of company], the CEO is expected to not cause or permit any action that is likely to result in [name of company] becoming potentially insolvent or unable to meet its debts and obligations as they fall due. 4.3.6 The assets of [name of company] are expected to be adequately maintained and protected, and not unnecessarily placed at risk. In particular, [name of company] must be operated with a comprehensive system of internal control, and assets or funds must not be received, processed or disbursed without controls that, as a minimum, are sufficient to meet standards acceptable to [name of company]’s external auditors. One of the tools used as a framework is an asset management plan for both on and off balance sheet assets. In managing the risks of [name of company], the CEO is expected to not cause or permit anyone to substitute his or her own risk preferences for those of the shareholders as a whole. 4.3.7 The CEO is expected to not permit employees and other parties working for [name of company] to be subjected to treatment or conditions that are unlawful, undignified, inequitable, unfair or unsafe. 4.3.8 The CEO is expected to not cause or permit payments to be made or rewards given unless they are in return for contributions towards the purposes of the business of [name of company] and

are proportional to the extent that those contributions have furthered such purposes.

¶119 Disclosure of governance practices In some countries, there is a mandatory requirement to publicly disclose governance practices. In New Zealand, in the absence of this mandatory requirement, it is highly recommended that all entities, regardless of size or legal structure, publish a disclosure of governance practices statement (or corporate governance statement). While there is significant diversity in the nature and extent of disclosure, the following example provides a guide of what could be included in a discretionary disclosure made to assure stakeholders of the probity of the entity’s governance practices. Disclosure statements can be found online for many of New Zealand’s publicly listed companies and these may serve as guides. Figure 1.5: Disclosure of Governance Practices Template

[NAME OF COMPANY] DISCLOSURE OF GOVERNANCE PRACTICES The directors are responsible for the governance practices of [name of company]. This statement sets out the main practices that were in operation throughout the financial year, except where otherwise indicated. Board of Directors The board carries out its responsibilities according to the following mandate: • the number of directors on the board should be no fewer than [number as per the Constitution]

• directors should possess a broad range of skills, qualifications and experience • the board meets [monthly] • all available information relating to items to be discussed at a meeting of the board is provided to each non-conflicted director prior to that meeting • the board and its individual directors are subject to regular evaluation. The board consists of [number and type of directors (eg four appointed and four elected)] directors. The chief executive officer attends all board and committee meetings except where specifically exempted during “board only” board meeting sessions. Details of the directors are set out on page [x] of this report. The primary responsibilities of the board include: • ensuring preparation of the annual and half-year financial statements • establishing the long-term goals of [name of company] and strategic plans to achieve those goals • reviewing and adopting annual budgets for the financial performance of [name of company] and monitoring results on a monthly basis • managing risk by ensuring that [name of company] has implemented adequate systems of internal controls together with appropriate monitoring of compliance activities, and • working with management to create member value. Independent Professional Advice With the prior approval of the chair, each director has the right to

seek independent legal and other professional advice at [name of company]’s expense concerning any aspect of [name of company]’s operations or undertakings to assist in fulfilling his or her duties and responsibilities as director. Circumstances that dictate this necessity are rare and must be justifiable, if called for, to the board. Board Committees The board has two standing committees, namely the Finance and Audit Committee and the Human Resources and Governance Committee. Other committees are formed for specific purposes and disbanded as required. Finance and Audit (F&A) Committee: The F&A Committee consists of three directors, at least two of whom must be appointed directors. The current directors of the committee are: [list directors’ names]. The F&A Committee provides a forum for effective communication between the board and external and internal auditors. The F&A Committee reviews: • the annual and half-yearly financial statements prior to their approval by the board • the effectiveness of management information systems and systems of internal control, and • the efficiency and effectiveness of the external and internal audit functions. The F&A Committee generally invites the chief executive officer, chief financial officer and the external and internal auditors to attend its meetings. The F&A Committee also meets with and receives regular reports from the external and internal auditors concerning any matters that arise in connection with the performance of their respective roles, including the adequacy of internal controls.

Human Resources and Governance (HR&G) Committee: The current directors of the HR&G Committee are: [list directors’ names]. The HR&G Committee assists the board in discharging its responsibilities relative to: • human resources management of risk and compliance, with all statutory and regulatory human resource requirements • recommending the organisation’s remuneration policy line • assisting the chair to conduct the CEO performance appraisal and performance plan, recommend any adjustments to the CEO’s remuneration, and ensure that the remuneration of the CEO’s direct reports aligns with the remuneration policy, and • overseeing and recommending governance policies and procedures, board remuneration, director appointments, annual board evaluation and board profiling. The HR&G Committee reviews the remuneration of all directors and executives annually and makes recommendations to the board. Remuneration, which may consist of base salary, fringe benefits, incentive schemes (including performance-related bonuses), superannuation and entitlements upon termination, is reviewed with due regard to performance and other relevant factors. In order to attract and retain executives of sufficient calibre to facilitate the efficient and effective management of [name of company]’s operations, the HR&G Committee seeks assistance from external advisers in connection with the structure of remuneration packages. Particulars of directors’ and executives’ remuneration are set out on pages [x] and [x] of this disclosure statement in the board’s annual report.

The HR&G Committee also reviews the composition of the board annually and makes recommendations to the board where considered necessary to ensure that the board comprises a balance of appointed and elected directors with an appropriate mix of skills and experience. When necessary, the HR&G Committee seeks assistance from external advisers in connection with the suitability of applicants for board membership. The terms and conditions of the appointment of directors are set out in a formal letter of appointment that deals with the following matters: • duration of appointment • remuneration • expectations concerning attendance at board meetings • conflict resolution, and • the right to seek independent legal and professional advice (subject to the prior approval of the chair). Risk Management The board is responsible for [name of company]’s system of internal controls. The board constantly monitors the operational and financial aspects of [name of company]’s activities. The board considers the recommendations and advice of external and internal auditors and other external advisers on the reputational, operational and financial risks that face [name of company]. The board ensures that recommendations made by the auditors and other external advisers are investigated and, where considered necessary, appropriate action is taken to ensure that [name of company] has an appropriate internal control environment in place to manage the key risks identified. In addition, the board investigates ways of enhancing existing risk management strategies, including appropriate segregation of duties, the employment and training of suitably qualified and

experienced personnel and, in conjunction with the recommendations of the F&A Committee, the scope and work programme of internal auditors. Code of Conduct As part of the board’s commitment to the highest standards of behaviour and accountability, [name of company] adopts a code of conduct to guide the board, management and employees in carrying out their duties and responsibilities. The code covers such matters as: • responsibilities to members • relations with customers and suppliers • employment practices, and • responsibilities to the community.

¶120 Board Annual Work Plan — what the board intends to achieve annually The Board Annual Work Plan specifies the goals or objectives the board intends to achieve. Like a company’s operating plan or an employee’s performance plan, the Board Annual Work Plan states goals, measures and due dates to enable the board to evaluate its performance against plan. The Board Annual Work Plan helps guide the board’s agenda and meeting content toward strategic matters rather than letting administrative and operational matters drive the board. A board without a work plan passively allows the administrative and urgent matters (not the strategic or necessarily important matters) to set its agenda. The template example below (Figure 1.6) highlights to the board the

content and balance of issues it addresses. This is not a “standard” or even a common work plan template, but it does focus the board on the types of matters it spends its time on and the balance of strategic versus administrative or operational matters. Like all the templates in this book, this work plan template is a starting point and can be modified, with experience, to better fit each board’s unique circumstances. The example below is for an entity that meets quarterly but can easily be extended to one that meets monthly (which allows for more time for strategic issues). As for Figure 1.5, because this is a small entity, its human resources committee and governance committee have been combined — a common approach for small- to medium-sized enterprises. Figure 1.6: Board Annual Work Plan Board Meeting Date

Strategic Matters

Operational Matters

Compliance/Admin/Secretarial Matters

Post AGM Present and discuss: • marketing and brand strategy • quality issues and procedures.

Approve budget. Review collective versus representative governance issues.

Elect chair. Approve dates for board meetings for next year. Review legal compliance matters.

September Discuss strategic and business plans.

Review board Review: policy. • professional advisers • intellectual property protection.

November Approve

Approve

Prepare audit for FELA

February

strategic plan presentation. Discuss human resources.

budget.

Committee meeting.

Discuss: • technological developments • stakeholders’ concerns and environmental issues.

Evaluate board performance. Review CEO’s performance. Approve: • goals for forthcoming year • remuneration for CEO.

Approve annual reports and accounts. Appoint auditor. Discuss business for AGM. Write off bad debts.

Chapter 2: CONFLICTS OF INTEREST Editorial information

Bede Carran

¶201 Introduction Organisations today are expected to be alert to the risks presented by conflicts of interest. At first, these risks appear quite distant from the unrelenting requirements to generate income, manage expenditure, and observe statutory and contractual obligations. In fact, if not managed appropriately, conflicts of interest can have severe and adverse reputational and financial consequences for an organisation. For example, a not-for-profit organisation was placed into liquidation, by order of the High Court, after a catalogue of selfinterested transactions between certain committee members and the organisation.1. Conflicts of interest expose an organisation to the suggestion that personal motive may have influenced a decision maker’s judgment. Such a presumption, once raised, is extremely difficult to rebut. Conflicts of interest are an inevitable consequence of active participation in the community. When people are involved in a variety of business and community organisations it is not possible to eliminate

the threat of a conflict of interest. However, it is important that the conflicts are managed so that a perception of bias does not arise. It is incorrect to form the view that identifying and disclosing a conflict of interest suggests poor governance or judgment. Quite the reverse can be the case. If an emerging conflict is identified and disclosed in a timely manner, this demonstrates sound governance and good judgment. This should enhance confidence in the organisation. What counts is to ensure that there is a means for identifying conflicts of interest and that, once identified, these conflicts are disclosed and managed openly and fairly for all affected parties. This chapter discusses how organisations identify and manage conflicts of interest. While the discussion applies to the organisation itself, it is principally directed to the members of an organisation’s governing body. Ethical behaviour required to manage conflicts of interest Proper management of conflicts of interest is important. It demonstrates a commitment to ethical behaviour by an organisation and its members. Acting ethically requires other attributes to be present and observed (eg ensuring that decision makers have the appropriate knowledge to make informed decisions and that they act with integrity). However, managing conflicts of interest appropriately is, undoubtedly, one of the core principles of ethical behaviour. Footnotes 1.

Registrar of Incorporated Societies v Hearing Association Whangarei Branch Inc HC Whangarei CIV-2007-488-406, 25 October 2007.

¶202 What is a conflict of interest? At its simplest, a conflict of interest arises when a person making a decision finds that he or she has divided loyalties. The circumstances in which a conflict of interest may arise are many and varied, which can include both financial and non-financial interests. Often, but not exclusively, conflicts of interest arise from financial involvement or interest in a transaction (also referred to as a pecuniary interest). However, conflicts can also arise from nonpecuniary arrangements or relationships (eg a close personal or professional association could taint the investigation of a member of a professional body whose conduct is being investigated). A failure to manage a conflict of this type could have adverse reputational consequences for the organisation and its governing body.

Example Mr Ford is a long-standing and respected committee member of a trade association. The association’s committee is considering the conduct of a member and whether there has been a breach of the association’s code of conduct. Mr Ford is a close personal friend of the member being investigated.

It is inappropriate for Mr Ford to consider whether the member has breached the association’s code of conduct. The proper course of conduct is for Mr Ford to disclose that he has a conflict of interest and remove himself from the committee’s deliberations. Actual or perceived conflict of interest

Conflicts of interest usually present as an actual conflict (see example 1 below) or a perceived conflict (see example 2 below).

Example 1 Mr Jones is a committee member of an incorporated society that promotes water sports and sailing for young children. The society resolves to purchase three small sailing boats from Mr Jones. He assures the society that they are being sold at below market value. Mr Jones has a direct conflict of interest. He is interested in the transaction as a vendor of the sailing boats. He is also a committee member charged with ensuring that the society receives the best possible value. While his assertion that the sailing boats are being sold to the society at below market value may be correct, he is not independent of the transaction.

Example 2 Mr Smith sits on a trust that funds overseas study for gifted students. One of the applicants is the daughter of a business colleague who does significant business with Mr Smith’s company. While Mr Smith has no direct financial interest in the selection of a particular student, there is an obvious conflict in him sitting on the selection panel. He cannot avoid the perception that a personal motive may influence his decision. In these circumstances, the appropriate course is for Mr Smith to remove himself from the selection decision. If he does not, both he and the organisation are open to claims that the selection of the successful applicants was influenced by factors such as the private interest of the trustees and was not based solely on the applicants’ merits.

In reality the appearance or perception of a conflict of interest is as damaging as an actual conflict. To manage a conflict of interest appropriately, it is important that decision makers are both

independent and seen to be independent. As it is difficult to examine motive, it is not possible to observe objectively whether a person is acting independently. For this reason, the appearance of independence is important. References to conflicts of interest in this chapter refer to actual conflicts of interest and perceived conflicts of interest.

¶203 Conflicts of interest where there is no personal benefit It is important to remember that a conflict of interest can arise even where there is no personal benefit to the member of an organisation.

Example Mrs Brown is on the board of trustees of Sunshine College. She is also a trustee of a community trust that distributes funds to various organisations, including local schools. Sunshine College has applied to the community trust for a grant to assist with building its new swimming pool. Mrs Brown, although not gaining personally from the transaction, has a conflict of interest as she has obligations to both organisations.

Where a person holds a public office, there is a requirement to ensure any conflict of interest is managed carefully. While the public organisation they represent will be expected (or required in some instances) to have appropriate policies in place to manage conflicts of interest, it remains very much the obligation of the individual with the conflict to ensure it is disclosed in a timely manner. People holding public office need to take special care to ensure their conduct does not give rise to a perception that it has advanced their personal or financial interests.

In part the reasoning is that it is the individual who has the requisite knowledge to ensure disclosure.

¶204 Process for managing conflicts of interest Successfully managing conflicts of interest requires an organisation to have a process for conflict identification, guidance on the nature of relationships that give rise to a potential conflict (often done by example) and how, once identified, the conflict will be disclosed and managed.

¶205 Identifying conflicts of interest A number of steps can be adopted to identify conflicts of interest as they emerge. Conflict of interest policy First, organisations should have a clear policy on conflicts of interest and their management. Members of the governing body have a duty to be acquainted with this policy. The policy does not need to be overly complicated or lengthy. The essentials of the policy cover: • the definition of a conflict of interest • the type of relationship that gives rise to an actual or perceived conflict of interest • the obligation of members to disclose a conflict of interest and how this is best done (eg in writing, at a meeting or prior to the meeting) • how conflicts, when disclosed, will be handled, and • how conflicts will be recorded. Having a clear statement on what constitutes a conflict of interest is vital. Without this, it is difficult to impress on members of the governing body the need to be alert and vigilant in identifying and disclosing

conflicts. Best practice is for an organisation to inform new members of the governing body of their obligations to identify and disclose conflicts of interest. Again, this need not be an extensive or onerous process. It can be as straightforward as the chair or a professional (eg a lawyer, accountant or valuer, who are all subject to strict codes of conduct governing conflicts of interest) who already sits on the governing body advising the new member that there is a policy on conflicts of interest: what they are and how they are handled. This process is strengthened if it is accompanied by a culture of openness and candour that encourages members to raise potential conflicts of interest. Timely circulation of detailed agenda items Secondly, the items to be discussed at a meeting should contain enough detail to allow members of the governing body to identify whether a specific item may give rise to a potential conflict. Circulation of the Agenda in a timely manner permits proper preparation and study of the items included. This allows a member the opportunity to identify whether any items will give rise to a conflict of interest. An Agenda that contains a list of bullet points as the basis of the Agenda is generally unhelpful in allowing office holders the opportunity to identify a potential conflict of interest. While it may be tempting to contend that a member of the governing body should have sufficient knowledge to know in advance whether a conflict will arise, this is not always possible.

Example Mrs Smith is a lawyer in public practice. She is also the secretary of her tennis club. The club resolves to resurface its courts at a cost not greater than $50,000. The chair and treasurer of the club are charged with seeking tenders to submit at a subsequent meeting. A tender is received from a client of Mrs Smith’s law firm. An agenda item that simply states “consideration of tenders for resurfacing” does not assist Mrs Smith in identifying in advance whether she may have a conflict. However, if the Agenda identifies the parties submitting a tender, and the Agenda

is circulated in a timely manner, this allows Mrs Smith the opportunity to disclose the potential conflict prior to its consideration.

Conflict of interest agenda item Thirdly, all meeting Agendas should include, near the top, an item entitled “Conflicts of Interest” or something similar. This allows all members to disclose before business has commenced any potential conflict they may have in an item of business. It is common for the disclosure to occur at this point of the meeting prior to the discussion of substantive business. There should be a clear record of whether any conflicts were disclosed. This record should form part of the Minutes of the meeting. Interests Register Finally, some organisations maintain an Interests Register (see Figure 2.1). In fact, this is a statutory requirement for companies under s 189(1)(c) of the Companies Act 1993. While it may not be a statutory requirement for other types of entities, such as incorporated societies and charitable trusts, it is good practice and the requirements imposed on companies could usefully be adopted by other organisations, particularly where the entity is established for charitable or not-forprofit purposes. An Interests Register records transactions where a member of the governing body has a financial interest. The information disclosed can include: • the nature of the relationship between the interested parties • the type and nature of the transaction, and • the amount of money involved. The Interests Register can also be used to record the interests that members of the governing body have in other organisations (eg shareholding in companies, interests in partnerships, and other governance positions, such as directorships and trusteeships).

The Interests Register should be updated whenever there is a change in the circumstances of a member of the governing body. As a matter of practice, it is prudent to conduct a formal annual review of the Interests Register. Some organisations have the Interests Register presented at each meeting for members of the governing body to either confirm there has been no change, or to advise of relevant changes, at each meeting. A couple of other points are pertinent. First, the Interests Register should be available for perusal by members and be part of the documentation available at meetings of the organisation. Secondly, care is required at all times to ensure the relevant dates of interests (eg their disclosure) are included in the Interests Register. Figure 2.1: Interests Register Example

[Name of Company] Interests Register Introduction [Name of company] is a limited liability company. Its main purpose is to [insert from Constitution or, if too vague, from Board Charter]. All directors of [name of company] are bound by the law relating to directors of companies (Companies Act 1993). They must act solely in the best interests of the company, uninfluenced by the possibility of personal benefit for themselves, their families, firms, employees, friends or other bodies of which they may be directors, officers or trustees. They should be mindful that they are involved in exercising a fiduciary function which requires a director to avoid potential and actual conflicts of interests. Conflicts of Interest Once appointed, directors are expected to make decisions strictly in accordance with the [name of company] Constitution, the Companies Act 1993, and any policies, bylaws and procedures adopted by [name of company], not as representatives of any

particular point of view or interest. A conflict arises when a director is interested in a transaction. The definition of “interested“ is in the Companies Act 1993: Section 139 (1) Subject to subsection (2) [of this section], for the purposes of this Act, a director of a company is interested in a transaction to which the company is a party if, and only if, the director— (a) is a party to, or will or may derive a material financial benefit from, the transaction; or (b) has a material financial interest in another party to the transaction; or (c) is a director, officer, or trustee of another party to, or person who will or may derive a material financial benefit from, the transaction, not being a party or person that is(i) the company’s holding company being a holding company of which the company is a wholly-owned subsidiary; or (ii) a wholly-owned subsidiary of the company; or (iii) a wholly-owned subsidiary of a holding company of which the company is also a wholly-owned subsidiary; or (d) is the parent, child, spouse, civil union partner, or de facto partner of another party to, or person who will or may derive a material financial benefit from, the transaction; or (e) is otherwise directly or indirectly materially interested in the transaction. (2) For the purposes of this Act, a director of a company is

not interested in a transaction to which the company is a party if the transaction comprises only the giving by the company of security to a third party which has no connection with the director, at the request of the third party, in respect of a debt or obligation of the company for which the director or another person has personally assumed responsibility in whole or in part under a guarantee, indemnity, or by the deposit of a security. Procedure There are two types of disclosure that should be made by a director (or a person holding governance positions or executive influence): • a disclosure of general interest (eg serving on another board, employment, stock or other ownership of another entity, a close personal relationship with another director or employee who may be a competitor or supplier), and • disclosures on specific decisions. If a director’s interests could give rise to a perception that his or her impartiality in the consideration of a decision might be compromised, he or she must consider whether it is appropriate for him or her to decline to take part in the consideration of that decision. Organisations will develop their own processes for dealing with a conflict. However, some of the principles are common to all. Where a potential conflict of interest arises, a director should raise the matter with the chair, who may advise the director what action is most appropriate under the circumstances. If there are existing policies in place to deal with conflicts of interest this will make the process more open and transparent. If necessary, it may be appropriate to take advice from the company’s governance adviser or legal counsel. Any final decision as to whether a director should take part in, or continue to take part in, the consideration of a decision shall be taken by the board in meeting.

Breach of the Rules Any reasonable suspicion that a director has been in material breach of the company’s policies on conflicts of interest should be referred to the board in meeting without the respondent director. However, it is also important that the rules of natural justice are followed. The director in question is entitled to be given an opportunity to present their position and have it heard and considered fairly and objectively. All of this occurs much more readily if there are established and agreed policies and procedures in place. The Interests Register Where a company is required, or elects (note changes to the Companies Act 1993 mean that some closely held companies are not required to prepare an annual report) to prepare an annual report, an Interests Register in respect of directors is required to be published in the annual report to shareholders and be made available for shareholders to inspect at any time. It shall include details of directors’ other directorships, remunerated employment, public appointments, trusteeships and any other associations which may present a potential or actual conflict. Register of Interests Below is an example of a register of interests to capture and record the material aspects and what resolution was undertaken for a company Round Wheel Transport Limited. Name Date Details How & Action of identified of date taken? director possible notified? conflict

Follow up required? (Y/N)

Mark Smith

Note in minutes when director is excused from

30 June 2015

Director and beneficial owner of Spare Wheels

1 July 2015, notice at meeting of directors

Director not to participate in or vote on matters related to procurement,

Limited, a large supplier to company

director to absent the room

meeting

Managing conflicts of interest

Managing conflicts of interest requires a disciplined process, including having a clear policy, timely circulation of the Agenda, ensuring an opportunity for disclosure by having their disclosure as a specific agenda item, and maintaining an Interests Register. These steps provide for conflicts of interest to be identified and disclosed as they arise.

¶206 Relationships that give rise to a conflict of interest Elucidating precisely whether a relationship gives rise to a conflict of interest is difficult, and is more readily described than defined.

Relationships in which there is a pecuniary or direct personal benefit will obviously give rise to a conflict of interest. It is also self-evident that transactions involving close relatives (eg a spouse, parent or sibling) will give rise to a conflict. Similarly, conflicts of interest are likely to arise where transactions involve close business colleagues (eg a fellow director, trustee or partner in a professional or business partnership). More difficult are the transactions that occur in the ordinary course of business or those involving acquaintances, former colleagues and other parties with whom you may have previously been involved. A measure of judgment and reflection is required in these circumstances. Questions such as whether there is any personal gain or benefit can assist in resolving the dilemma. It is also important to remember that a relationship terminated after unresolved conflict or in litigious circumstances may give rise to allegations of a conflict of interest. In essence it is important to avoid the allegation of “settling old scores”.

¶207 Managing conflicts of interest once identified As already mentioned, the occurrence of a conflict of interest does not necessarily indicate poor governance. However, once a conflict is identified, it is essential that there is a process in place for its management. This process must be transparent, rigorous and fair. Organisations have differing approaches to managing conflicts of interest once they are identified and disclosed. Some organisations ask the conflicted member to excuse himself or herself from the room while the relevant agenda item is discussed. Other organisations allow the member to remain but not to participate. The former method is to be strongly preferred. It is difficult to understand how an unfettered discussion can take place while the conflicted member remains present. It leaves the organisation open to the allegation that discussion may not have been as open and robust as it should have been. Essentially, there is a significantly heightened risk of an allegation of implied censoring because of the conflicted member’s presence.

It is important that the Minutes record the departure of the conflicted member from the meeting. Generally, the departure of the affected member from the meeting is sufficient, and in reality little else can practicably be done. However, having a clear policy combined with strict adherence will usually ensure that conflicts are identified and disclosed, and that the member takes appropriate non-participating action.

¶208 Dealing with a conflict disclosed after the decision Disclosure of a conflict of interest after a decision has been made can give rise to an awkward situation. It may also have legal and reputational risks for the organisation and the conflicted member. Remedying or mitigating the decision will depend on a range of factors, including whether the decision is subject to legislation or has been published to external and interested parties. It may not be possible to reverse the decision. Prior to suspending or reversing a decision, real care must be exercised to ensure that nothing is done by the organisation which is ultra vires (ie outside its powers). For example, if the organisation is a charitable trust, the terms of the trust deed should be examined. If the organisation is funded in some way by public money, or holds a licence of a particular kind (eg a liquor licence or gaming machine licence), its decisions may be subject to legislation of some type. In these circumstances, the legislation must be reviewed to ensure that the corrective action is permitted and is itself compliant with the legislation. The simplest situation is where the organisation can reconsider the matter without the conflicted member present. Members must be careful to reconsider the matter ab initio (from the beginning) and with an open mind. They must be particularly careful not to have a predetermined view on the outcome. Full Minutes of the discussion should be kept. Even then there is a risk that, if the decision remains the same, the issue of predetermination will arise.

Example P Dantic sits on the admissions board of a trade association. An application for membership of the trade association is received from a former employee of P Dantic’s company. The former employee left after unresolved disputes with one of P Dantic’s senior staff. After the decision is made to decline the former employee’s application for membership, P Dantic discloses the relationship with the former employee. At a subsequent consideration of the matter, the admissions board affirms its earlier decision to decline entry to P Dantic’s former employee. The admissions board must be careful to ensure that it considered the matter independently and without predetermining the application based on the earlier hearing. (Obviously, having objective criteria with written reasons for all candidates will assist in managing this type of issue.)

Difficult and problematic issues arise if the decision involves a financial commitment, if the decision has been announced or published in some way, or if legislation governs the organisation’s decision making. In such circumstances, it may be necessary to seek legal advice. Late disclosure of conflict of interest

There is not necessarily an easy fix to a late disclosure of a conflict of interest. Proper policies and procedures for identification and disclosure of conflicts of interest, and a transparent means of handling these conflicts are essential.

¶209 Conflict of interest checklist Figure 2.2: Conflict of Interest Checklist

Conflict of Interest Checklist Does your organisation have a policy on conflicts that contains: •

a definition of a conflict of interest

•

discussion on the nature of relationships which give rise to a conflict of interest, and

•

how a conflict of interest will be managed when identified?

Is a member of the board or committee charged with mentoring new members on how a conflict of interest is managed by the organisation? Are all Agendas distributed with sufficient time and particularised details to allow members to identify a conflict of interest prior to the meeting? Is the disclosure of conflicts of interest a standing item on the meeting Agenda of every committee and subcommittee? Have the Minutes of the meeting recorded whether there were any conflicts noted and, if so, by whom and for what reason? If no conflicts are disclosed, has this been recorded in the Minutes? Do the Minutes record that the conflicted member left the meeting room?

✓

Chapter 3: UNDERSTANDING FINANCIAL STATEMENTS Editorial information

Marnus Beylefeld

¶301 Introduction Businesses are generally required to prepare financial statements. This is most often because the business falls within the scope of the Financial Reporting Act 2013, the Financial Reporting (Amendments to Other Enactments) Act 2013, the Companies Act 1993 or the Financial Markets Conduct Act 2013. Most commonly, but not always, a business’ financial statements must be prepared in accordance with generally accepted accounting principles (GAAP) in New Zealand as issued by the External Reporting Board (XRB). The XRB uses a “tiered” approach in promulgating its accounting standards; and directors should be familiar with the specific tier applicable to their business. Financial statements are important documents for the shareholders, the management, the directors and for any other party that wants to understand the business (eg lenders, employees or potential investors of the business). The financial statements not only reflect the business’s performance over the period but also its financial position at the time, as well as providing other important information. When

looking at financial statements, it is important to consider the period to which they relate and to consider whether they still apply. This chapter explores the financial statements themselves, the basis on which they have been prepared and some of the key areas to consider when reading them. It then examines the common methods used to analyse the financial statements to better understand the business.

¶302 Understanding financial statements In order to understand and make useful decisions based on financial statements, you must first understand the purpose for which they have been prepared, what period they relate to, and on what basis they were prepared. Interpreting the financial statements is easier when you have a good understanding of the business and what it does. Financial statements are a record of the historical performance and financial position at a point in time. They can be prepared for management, for tax purposes, to satisfy statutory reporting or for some other purpose, such as the sale of the business or to raise finance. They reflect the financial position of the business at the date indicated and can be used to review the profitability of a business, its financial stability and its solvency at that date. It is equally important to understand the basis on which the financial statements are prepared, whether they are annual financial statements, management accounts, tax accounts or for some other special purpose. This will affect the way some items are disclosed or valued and ultimately may result in different results being reported. For a company, financial statements must be prepared in accordance with the Companies Act and the Financial Reporting Act and must be prepared on a consistent basis. However, some business (such as trusts, partnerships and sole traders) can prepare special purpose accounts, which may be for some special purpose only (such as only for income tax purposes). Care should be taken when considering accounts that have been prepared for tax purposes alone or have been prepared as “special purpose” accounts because they may not

present the same result as general purpose accounts prepared under generally accepted accounting principles (GAAP). As its point of departure in preparing New Zealand accounting standards, the XRB uses International Financial Reporting Standards (IFRS) for private, for-profit business and International Public Sector Accounting Standards (IPSAS) for not-for-profit, public benefit entities. The XRB has two tiers of financial reporting standards for private, forprofit business and four tiers of reporting for not-for-profit, public benefit entities. This chapter mainly deals with the financial statements of for-profit entities. The two tiers of financial reporting standards in general purpose GAAP accounts, can broadly be distinguished as NZ-IFRS (New Zealand equivalents to International Financial Reporting Standards) and NZ-IFRS-RDR (New Zealand equivalents to International Financial Reporting Standards with the Reduced Disclosure Regime). The main elements of financial statements are the statement of financial position (commonly known as a balance sheet) and the statement of financial performance (commonly known as an income statement), which, along with the statement of changes in equity, statement of cash flows, the accounting policies and the notes to the accounts, form the annual accounts of a business. Some businesses’ financial statements must be audited by an independent auditor after they have been prepared. See Chapter ¶7 on the audit requirements of businesses in New Zealand.

¶303 Statement of financial position (balance sheet) The balance sheet records the assets, liabilities and equity of the business, be it a company, trust, partnership or sole trader. A balance sheet reflects a picture at a point in time. It is prepared as at a specific date, so the balance sheet will be entitled “Statement of financial position as at (say) 31 March 2016”. This means that the results, depicted on the balance sheet, were the financial position on that particular day. A balance sheet is organised into three elements: assets, liabilities

and equity. As its name suggests, the balance sheet must “balance”, with the total of liabilities and equity equalling assets: Assets = Liabilities + Equity The intuition of the above is that the assets of the business belongs to two groups of people, the lenders (owning the liabilities) and the shareholders (owning the equity). Their combined claims on the assets must equal the value of the assets. Current assets and current liabilities Assets and liabilities can be further divided into current and noncurrent assets or liabilities. This generally distinguishes the period over which the assets will be used, or the liabilities repaid. As a rule of thumb, current assets will be consumed within 12 months, current liabilities repaid within 12 months and all non-current items are longer than 12 months. Some common examples of current assets or current liabilities are cash in the bank, accounts receivable and accounts payable. In an accounting sense, the difference between current assets and current liabilities is called working capital. The higher the working capital, the more liquidity (ie cash or cash equivalents) tends to be available to the business in the short term. Some businesses need less working capital on hand than others, as they may have higher levels of cash sales or higher levels of inventory turnover. Businesses that have longer sales cycles may need more working capital on hand to finance the operation until the sales pay off. Fixed assets Fixed assets are not necessarily tangible. A fixed asset is a longerterm asset (such as land, buildings, trademarks or equipment). The fixed assets are generally depreciated (or amortised in the case of finite life intangible assets) over their useful lives to recognise the estimated depletion of the asset until it is finally used up. In practice, most private companies use the depreciation rates estimated by Inland Revenue, rather than having to estimate the useful lives of the fixed assets themselves.

It is important to recognise that assets are generally shown on the balance sheet at “cost less depreciation”, which means the value shown is the historic cost of the asset less this time-based depreciation of its useful life. This result does not necessarily represent a value for which the asset could be sold today. For some assets, it may have been appropriate for them to be revalued regularly (eg land and buildings that may have gone up in value) rather than reporting them at “cost less depreciation”. Such a revaluation should be clearly noted in the accounting policies and the amount of the revaluation should be clear in the notes to the financial statements. Inventory If the business manufactures or sells a product, the value placed on the inventory at the end of the period impacts on the margin reported and, therefore, the profit for the period. Inventory should be reported on the lower of cost or net realisable value in the balance sheet. That way, if the inventory has deteriorated or has become obsolete, the impact is reflected in that period but, importantly, no margin is recognised until the inventory is sold (which would happen if the inventory was valued at “market” value). Intangible assets Intangible assets are items such as goodwill and intellectual property (eg patents, trademarks, brands) that have value to the business but have no physical form. These assets are difficult to measure and are generally recorded at cost initially and amortised over time if they have a finite life. Take care when reading a set of financial statements that show an intangible asset. Is the cost still a realistic value? If not, what would a more realistic value be? There are some peculiarities to understanding the intangible asset, “Goodwill”. In order to be recognised on a balance sheet, the business in question must generally have purchased the goodwill. That means that, unless a business purchased the goodwill, it may not be present on its balance sheet. As such, businesses who build up their own goodwill (called “internally generated goodwill”) will not have that goodwill evidenced on their balance sheet. It would generally require a formal business valuation to identify and quantify the internally

generated goodwill. Intangible assets can pose difficulties without professional advice. However, if you can understand how the value was calculated initially and exactly what it covers, you will be able at least to consider what you feel is appropriate. Term liabilities Term liabilities are longer-term debts due by the business, including items such as bank loans, finance leases and hire purchase. The portion that is due within a year is shown in current liabilities, while the balance due in over one year is reported in the non-current liabilities. Equity Equity represents the owners’ or shareholders’ share of the assets of the business. As already mentioned, if assets listed on the balance sheet are sold, their value may not be the same as indicated in the financial statements. Goodwill may perhaps not even appear on the balance sheet. Therefore, the indicated equity is not necessarily the amount that would be returned to the shareholders if the company were to be wound up. Equity includes the capital that has been paid in by the shareholders, profits from previous periods that have not been distributed, and any other reserves such as capital gains. A company can have many classes of shares, which can have differing rights and, therefore, values. The rights associated with each class are generally set out in the company’s Constitution which is registered at the Companies Office (see chapter 12 for more information on the Companies Office), or in a shareholders’ agreement. While companies are not legally required to file a Constitution, if a company has more than one class of shares, it must register a Constitution outlining the details.

¶304 Statement of financial performance (income statement) The income statement (or profit and loss account) of the business

records the performance of the business over a specified period, generally a year, but can be for other periods depending on the purpose for which the records have been prepared. Other than the balance sheet then, an income statement reflects the movements over a pre-determined period. The income statement will be entitled “Statement of financial performance for the year ending (say) 31 March 2016”. The income statement presents the income and expenses, both operating expenses and one-off costs, as well as the tax charge for the year and comparatives for the previous accounting period. Depending on the type of business (eg product based, service based, investment), the income statement will differ in its form but should clearly identify any direct costs (ie those that affect the gross profit), overheads, operating profit, other income and expenses and the profit before and after tax. Gross margin (gross profit) Gross margin is the value after the direct costs and costs of goods or services sold have been deducted from the sales for the period. There is some subjectivity involved in the distinction, but direct costs are generally those costs which are variable, that is, they are only incurred because the goods or services were sold (such as the raw materials necessary to build a widget). Contrary thereto, indirect costs have a lower degree of variability. That is, the business incurs those costs whether the goods or services are sold or not (such as legal fees or other overheads). When reviewing the gross margin of a business, you should consider the type of business and what sort of costs have been included under the direct costs. For a manufacturer, for example, the direct costs should include the wage and salary costs of staff employed in the manufacturing process, while the salary costs of the administration staff may be shown in the overheads section. EBIT and EBITDA These two measures, earnings before interest and tax (EBIT) and earnings before interest, tax, depreciation and amortisation (EBITDA),

show the profits for the year before the effect of certain commonly observed expenses have been recognised. They are, in effect, two levels of measuring profits exactly as their names suggest. These earnings measures are often used to compare and value businesses. They provide a good benchmark to compare business that may have different levels of borrowing, tax or depreciation. Net profit before tax Net profit before tax is the profit for the year after deducting all expenses for the year, including one-off expenses, from all revenue earned by the business but before deducting income tax. Net profit after tax (NPAT) Net profit after tax is the profit for the year after deducting all expenses for the year, including one-off expenses and taxes, from all revenue earned by the business.

¶305 Statement of movements in equity (equity statement) The statement of changes in equity shows the movements in the claims of the equity-holders on the business’ assets. These changes may include, the profit after tax for the year, any dividends and distributions, and capital injections made by the shareholders. This is the part of the financial statements that reflects what has happened (over time) to the ownership claims of the shareholders. The shareholders are entitled to the net profits (because the debt holders get the interest and the government takes the tax). Dividends reduce the shareholders’ claims upon the business, because a dividend is a pay-out of the shareholders’ claims to them. The more dividends they get, the fewer claims they have left on the assets of the business. In a unique way, the dividends paid to shareholders in this statement can actually be “verified” by them. This is the only part of the financial statements which will actually also be reflected in the shareholders’ own bank statements, so be sure to get this right — because they can verify it for themselves.

¶306 Statement of cash flows Many private businesses are not required to prepare formal statements of cash flows. The statement of cash flows, however, is a powerful tool, as it shows the source and application of cash and can highlight where a business has been profitable but seemingly has no cash, or where it has been selling assets to finance operating activities. Certain users of your financial statements (such as lenders) are principally concerned with your cash flows, and preparing a statement of cash flows for them will often be useful. The cash flow statement reflects the cash that has been received by the business and how it has been applied, and is split into three areas: cash flow from operating activities, investing activities and financing activities. Operating activities Operating activities reflect the cash flows from trading activities (eg receipts from customers and payments to suppliers and employees). Importantly, the cash flow statement also reconciles the operating cash flows with the profit the business has reported in the income statement. During a period of growth, a business could generate good profits but, because of a need for additional working capital or an issue with customer collections, could have a negative operating cash flow. Investing activities Investing activities include the purchase and sale of long-term assets and investments (eg shares in other companies, large equipment or IT systems). Financing activities Financing activities relate to the borrowing and equity of the business, including funds received from banks and shareholders, and distributions and repayments to them.

¶307 Accounting policies and notes to the accounts General purpose financial statements should also include the accounting policies according to which the financial statements have been prepared. While they may not appear to be, these are important in analysing the financial statements. This is because accounting policies allow for a certain degree of subjective judgment in their application. Therefore, it is important to review them to ensure that you fully understand the basis on which the accounts have been prepared and whether there are any special items that should be considered. Examples could include how certain assets are measured (at cost or on a revalued basis) and how certain financial instruments are accounted for. While these may not seem of interest, they both change the balance sheet and potentially result in a different profit figure being reported. The notes to the accounts include additional detail about the main financial statements. If an item in the main financial statements (balance sheet, income statement, statement of changes in equity and statement of cash flows) bears a reference to a sub-note, more detailed information about the particular item can be found at the notes to the financial statements. The notes may include items that, although not present on the face of the main financial statements, warrant further disclosure to the readers of the financial statements. Such items may include disclosures about contingent liabilities and capital commitments.

¶308 Analysing financial statements Once you understand the financial statements, there are several ways in which you can analyse them to get a clearer picture of the business’s current position, its historical performance and drawing inferences about its future prospects. Time-series analysis Time-series analysis is useful to understand how the business has

been tracking and particularly how it has been growing or changing over time. While the annual financial statements should show at least one year’s worth of comparative information, if data can be obtained for more years, a trend can be established in many areas (eg turnover, gross profit and profitability), which gives you more tools with which to consider the future prospects. By analysing results over time, one can infer certain observations about the business’s performance. Examples include inferences about how the business was impacted when the economy changed, what occurred when new management took over or where inefficiencies are starting to occur. Cross-sectional analysis (comparative analysis) A second important way to understand a business is to compare it to other similar businesses (ie find businesses which are similar in nature and generally speaking in the same industry). There are many surveys of benchmark data available but unfortunately it is not often possible to find an exact comparison. Nevertheless, it can be useful to compare key measures against businesses within the same industry. This comparative analysis will enable you to highlight areas of the business where it is perhaps not operating to the best of its ability (compared to other businesses of a similar nature) and potentially highlight areas that can be worked on to improve its financial performance. When selecting the benchmark comparison, take care to consider such things as size and scale, geographic location and the exact nature of the business. Ratio analysis Finally, and importantly, financial ratios can be used to analyse the business. A common set of ratios, often used to analyse financial statements, should be selected based on the business being analysed. These ratios provide an extremely useful way to understand the underlying business and to compare it against both its own past performance and other businesses. The main areas analysed are typically: • growth

• profitability • liquidity • solvency and activity. Each of these areas are discussed below. As already mentioned, the annual result does not often provide much insight, and care must be taken not to overemphasise any one result, either positive or negative. It is important to compare the annual result against the historic performance of the business as well as against industry norms, economic conditions and comparative company benchmarks. The ratio can then be used as a guide or aid for business decisions and provides a useful mechanism for measuring the outcome of the business decisions made. When you are forecasting, it is advisable to run these same measures over the forecast information to ensure that the plans are impacting on the business in the way expected. This again leads to better quality management information and analysis in the future. Ratio analysis is an important tool in analysing financial statements, especially when combined with cross-sectional analysis or time-series analysis. Growth Calculating ratios to determine the rate of growth (both actual and inflation adjusted) indicates whether the business could potentially be growing, not growing enough, or in fact stagnating. It goes without saying that we can measure the rate of growth in any part of the financial statements. We will discuss the growth in revenue as an example. A business that grows too quickly runs the risk of growing unsustainably, while one that grows too slowly runs the risk of stagnating. Good growth is manageable, sustainable and profitable. Revenue Growth % =

Latest year’s revenue − Previous year’s revenue

Previous year’s revenue The aforementioned growth will indicate “nominal” growth, which includes the inflationary impact price increases. It reflects the growth from selling more goods and services as well as the increase in the price of those goods and services. A more accurate measurement of growth is to calculate “real” growth or growth after taking account of the price inflation. Real growth in revenue = [(1 + Nominal growth in revenue %) ÷ (1 + Inflation %)] 1 The resultant real growth should indicate the growth from selling more goods and services only. Profitability Growth alone is not necessarily a good measure of financial success, as it does not reflect profitability. Measuring the gross margin over time and the net operating profit margins (ie profits being generated from each dollar of sales) gives a better view as to the quality of the growth being obtained over time. Equally important is the rate of return being earned on assets and equity compared with the rate of return on other investments. A business will not be able to continue unless it is profitable or has other financial support. Three ratios examine different measures of profitability and comparisons to revenue. Gross margin

=

Gross profit Revenue

Net operating profit margin before interest and tax (often called EBIT) to revenue = EBIT Revenue

Net operating profit margin after interest and tax (often called NPAT) to revenue = NPAT Revenue The two following ratios look at the return on both assets and equity, in order to measure whether the owners are getting a return acceptable against other investment measures. Net Income Return on = Average tangible assets assets Return on = equity

Net Income Average total equity

Liquidity Many businesses fail, despite being profitable on paper, because of a lack of cash flow liquidity. In other words, while they are making a profit in the financial statements, they do not have cash available to pay debts as they fall due and, therefore, cannot continue to operate. The “current ratio”, which measures the business’s current assets against its current liabilities, is a clear sign of liquidity — the higher the ratio, the better the liquidity available to the business. Any ratio below one is generally a warning sign as it indicates that the company does not have sufficient cash or liquid assets to settle its immediate debts as they fall due. Another ratio, the “quick ratio”, goes further to include only the most liquid of current assets (ie cash and equivalents and accounts receivable) against current liabilities (ie accounts payable). This is a measure of what could immediately be settled against shortterm liabilities. The quick ratio is easy to use and provides a quick indication of short-term liquidity. Debtor days and creditor days are measures of how quickly the

business is being paid by its customers and how quickly it is, in turn, paying its suppliers. An increasing number of debtor days indicates that while sales are being made, it is becoming more difficult to collect the cash, which is a warning sign in terms of future liquidity. An increase in creditor days, if not managed appropriately, indicates that the business is having difficulty paying its suppliers. Current ratio The current ratio measures liquidity by comparing current assets to current liabilities. Current ratio

=

Current assets Current liabilities

Quick ratio The quick ratio examines only cash and equivalents and accounts receivable to pay current liabilities.

Quick ratio =

Cash and equivalent plus accounts receivable Current liabilities

Debtor days The debtor days measure calculates the number of days it has taken the business to collect funds from its debtors, based on the current year’s experience. Debtor days outstanding

=

Trade debtors Sales (incl GST)

×

365 1

Creditor days The creditor days measure calculates the number of days it will take for the business to pay its creditors, based on the current year’s experience. Creditor days

Trade creditors

365

outstanding

=

Credit purchases

×

1

Inventory turnover The ratio below measures the number of days it should take for the business to sell the inventory it has on hand, and therefore how many times in a year the business is “turning over” its inventory.

Inventory turnover

=

Cost of goods sold Average inventory

Solvency and Activity There are a number of ratios that measure the solvency of the business. Lenders will primarily be concerned with these ratios and you may even see the bank impose positive “covenants” upon your lending arrangements with them. Their covenants may require that some ratio always be above a certain level, or that you may have to inform them if it drops below some level. Two important measures of businesses that rely on debt finance are the debt to equity ratio and the interest cover. The debt to equity ratio measures how much of the business’s funding is provided by external providers, generally a bank or finance company, against that provided by the shareholders. Interest cover reflects how many times the interest cost of the external debt is covered by the profits generated by the business. Replacement ratio Another ratio to consider whether investment is adequate to safeguard future production is the “replacement ratio”. The replacement ratio measures the ratio of new capital investment in fixed assets, relative to the depreciation of your existing fixed assets. Intuitively, it should be clear that, if this ratio is at or near 1:0, that would suggest that the business is approximately replacing the value of its fixed assets every year by way of new capital investment.

Replacement ratio

=

Net cost of assets bought during the year Depreciation charge for the year

Debt to equity ratio The balance between external and internal providers of finance can be measured by the debt to equity ratio. Debt to equity ratio

=

Debt Equity

Interest cover ratio How easily a business can service its debts may be measured using the interest cover ratio, sometimes called “Interest Service Coverage Ratio” or ISCR. EBIT Interest cover

= Interest charges Understanding of business environment is crucial It is important to view ratios over time, as any one ratio may not be appropriate without comparative data. While benchmark analysis is useful, it may provide a distorted picture. If you wish to fully understand the financial outcomes, it is best to understand the environment the business is operating in, its competitors and its previous financial position (eg the gross margin expected of a furniture retailer will differ from that of a clothing manufacturer).

¶309 Tips Most accounting firms issue a set of illustrative, model financial statements on their websites. These tend to be comprehensive and should provide you with ample guidance on the basics of financial statement layouts. Analysing financial statements is a skill that can be learned. The internet is filled with commentary, analysis and techniques that you can employ in analysing a set of financial statements. Be aware that often these ratios and terms are not standard across the world. Some jurisdictions and practices may calculate or define ratios differently. Do not let that put you off. The key is to use consistent definitions in your own analysis across time and across comparative businesses. Analysing ratios in a graphical form (using charts or histograms) often make them easier to grasp and understand. We have listed below those ratios already described in the chapter, along with some additional ratios you may wish to study: Growth • Nominal revenue growth = [(Last year’s revenue ÷ this year’s revenue) − 1] • Real revenue growth = [(1 + Nominal revenue growth %) ÷ (1 + Inflation %)] − 1 Liquidity Ratios • Current ratio = [current assets ÷ current liabilities] • Quick ratio = [(cash and equivalents + receivables) ÷ current liabilities] • Cash Conversion Cycle = [days of sales outstanding + days of inventory on hand − days of payables] • Defensive interval = [(cash and equivalents + accounts receivable) ÷ average daily cash expense]

Profitability Ratios • EBIT Margin = [EBIT ÷ Revenue] • Return on Assets = [Net income ÷ Average total assets] • Operating return on assets = [EBIT ÷ Average total assets] • Return on Equity = [Net income ÷ Average equity] Solvency Ratios • Debt to equity ratio = [Debt ÷ Equity] • Debt to capital ratio = [Debt ÷ (Debt + Equity)] • Financial Leverage = [Average total assets ÷ average equity] • Interest coverage = [EBIT ÷ interest payments] Activity Ratios • Inventory turnover = [cost of sales ÷ average inventory levels] • Days of inventory on hand = [365 ÷ (cost of sales ÷ average inventory levels)] • Days of payables = [365 ÷ (Purchases ÷ average trade payables)] • Days of sales outstanding = [365 ÷ (annual sales ÷ average receivables)] • Total asset turnover = [revenue ÷ average total assets] • Replacement ratio = [Capital expenditure to replace assets ÷ depreciation of assets]

¶310 Conclusion Understanding a set of financial statements may initially appear

daunting, but do not let that stop you. There is a treasure trove of information once you have gotten to grips with the terminology, the formulations and layout. Spend the time to read them and you will find insights into the businesses’ performance, its challenges and its opportunities. Financial statements are, to some degree, standardised — so you will develop a transferable and necessary skill that you can apply to other businesses. No director can practically govern a business without a comprehensive understanding of financial statements.

Chapter 4: INSURANCE AND INDEMNITY Editorial information

Bede Carran

¶401 Introduction All organisations require the means to protect themselves from adverse financial consequences arising from unforeseen events. Understanding the role of insurance within the broader risk management framework is important — specifically that insurance is simply one aspect of risk management. Insurance policies often require an organisation to have in place appropriate processes to manage its risks; failure to do so can invalidate its insurance policy (ie contract for insurance). See chapter 11 for more information on risk management.

¶402 Insurance contracts Insurance contracts are a unique type of contract in the commercial world. Described as contracts of the “utmost good faith”, they require the insured (the party seeking insurance) to voluntarily disclose all relevant information to the proposed insurer (the company providing the insurance), whether it is specifically requested or not.

It is vital that the insured understands this requirement and the obligations it imposes. Failure to understand this disclosure obligation can result in material information being withheld, often quite innocently, which may invalidate a later claim under a policy. The requirement to voluntarily disclose all known information to the insurer distinguishes insurance contracts from other contracts. Generally, in other commercial contracts, the parties are obliged only to disclose what is requested. Many insurance claims would not encounter the issues they do if the party seeking the insurance appreciated the requirement for complete and total disclosure, whether specifically requested or not. Broadly, the reason for this onerous obligation of disclosure is that it is the party who is seeking the cover (the insured) that holds and possess the information, not the insurer who is providing the cover. Full disclosure of relevant information required

Insurance contracts require full disclosure of all relevant information whether specifically requested or not. It is a common failing of the insured not to appreciate the need for complete and total disclosure. This omission can have serious consequences when making a claim.

Example Mr Brown acquired a rental property that was already tenanted. He was aware that the tenants were members of a motorcycle gang. When seeking insurance, he did not mention the tenants’ gang connections to his insurer. Some time after the tenants left, the property was destroyed by fire. There was no suggestion the tenants were responsible for the fire but nonetheless the Court of Appeal held that Mr Brown should have disclosed to the insurer that the tenants were members of a gang, and this failure amounted to a material non-disclosure. On this basis, the insurer was entitled to void the policy. The innocent non-disclosure was a material

matter and allowed the insurer to void making a payment under the policy: State Insurance General Manager v McHale [1992] 2 NZLR 399.

¶403 Types of insurance Insurance can be acquired for most types of asset and business risk (see below for some risks and losses for which insurance cannot be obtained). People are usually familiar with property insurance for substantial and valuable assets (eg houses or buildings (holding insurance is often a term of the mortgage agreement with the lender), personal effects, motor vehicles and other items of significant value such as major items of plant and equipment for a business). Insurance can also be acquired to protect against loss arising from other risks, or the liability of a person or company to make good a loss it may have caused in the course of carrying on its business. Common types of insurance available for these risks are discussed below. This is by no means an exhaustive list. Business interruption insurance Sometimes referred to as “loss of profits” or “consequential loss” insurance, these policies provide cover for expenses incurred when a business is unable to continue because of an adverse event such as fire, storm damage or earthquake. Directors’ and officers’ insurance This provides cover to directors of companies or persons holding a governance position within an organisation (eg committee members of an incorporated society or trustees of a trust) for financial loss to the organisation caused by omissions or acts of negligence during their time as a director or office holder. The cover often includes legal costs associated with defending a claim or dealing with a negligence claim. Employment-related insurance cover A range of policies provides cover to employers for claims arising from

events such as accidents causing injury to an employee or wrongful dismissal. The cover often includes legal costs incurred in defending or resolving such claims and some fines and penalties but excludes fines imposed under occupational safety and health legislation. Key person insurance Some businesses or organisations are very reliant on one person without whom the business or organisation would not be able to operate. In these circumstances, the key person can be insured and if he or she has an accident, falls ill or dies, a payment is made to the organisation to assist with the financial effects of losing that key person. Product liability insurance This provides cover against defective products and the cost of recalling a product. Professional indemnity insurance This provides cover, usually to professionals such as lawyers, accountants, business advisers, engineers and surveyors, for negligent advice or work they undertake as part of the professional services they provide. It may be worth asking your accountant or other professionals you engage whether they carry professional indemnity insurance. Public liability insurance This provides cover for claims against a business or organisation (eg an incorporated society) where there is injury to a person or damage to property caused by negligence or an accident. It is common for tradespeople and businesses to carry this type of cover.

Example Mr Black runs a contracting business. One of the employees accidentally damages a parked car while carrying out excavation work. Public liability insurance covers this type of damage.

Contractors’ single-project liability insurance is another type of public liability insurance which is available for single projects to cover particular risks that are project specific and do not exist on all projects a contractor undertakes. Special events insurance Special events insurance cover, which can be obtained for one-off events held by organisations, can be particularly relevant to not-forprofit organisations or other entities (eg organisations that hold an annual event that is a significant fundraiser). Specialist assets insurance This covers certain types of commercially used marine vessels, their cargo and aircraft for which there is specific insurance. Risks and losses that cannot be insured There are some risks that insurers are either unwilling or unable to underwrite. In the former, it may be that the risk is considered too high, for example, it may be difficult to get key person insurance if the key person has health issues. In other instances, legislation prohibits the indemnifying of persons or entities. For example, the Health and Safety at Work Act 2015 prohibits insurance being used to underwrite fines imposed on persons or entities. There is a public policy that underlies this statutory approach. It is intended to increase the compliance of those persons who are conducting a business undertaking.

¶404 Purchasing insurance — what sort of cover do you need? When purchasing insurance, you must consider a number of matters. Care is required to ensure that the correct type and amount of insurance is purchased.

Insurance for property is usually readily identifiable. It includes cover for property such as buildings, cars and major items of plant and equipment. When purchasing property insurance, you should consider the level of cover to be taken and the level of loss the organisation is prepared to sustain. What level of cover is to be taken? For buildings subject to a mortgage, review the loan and mortgage documentation to check for conditions that specify the type and level of cover to be held, and consider obtaining a registered valuer’s certificate to ensure that the appropriate level of cover is taken. For motor vehicles, consider whether full cover insurance will be taken or just third-party cover. A third-party policy covers damage to another person’s vehicle but not damage to your own vehicle. What level of loss is the organisation prepared to sustain? The level of loss the organisation could not sustain will influence significantly the type of insurance purchased (eg replacement insurance, agreed value insurance or indemnity insurance). Indemnity insurance restores the financial position of the insured party that existed before the loss occurred so far as that is possible. Indemnity insurance may also be up to an agreed amount. This means up to the agreed amount is the maximum received by the insured even if the financial loss is greater than the agreed amount. More difficult issues arise when purchasing other types of insurance such as business interruption insurance, directors’ and officers’ cover and liability insurance. It is important to identify exactly the risk that is being insured. It is not uncommon for businesses or organisations to find that their insurance cover is inadequate — either the extent of the cover or the type of cover or both. To identify the type of insurance required, it is important to specify the risks to which your business is subject. Most businesses will consider whether business interruption insurance, public liability and key person insurance are relevant and desirable. Taking advice from a chartered accountant, lawyer or insurance broker about appropriate insurance is prudent and strongly recommended.

It is not possible to generalise about the types of insurance a business should take. However, it is common for businesses such as cafés, restaurants and retail businesses to carry business interruption insurance. A contracting business commonly carries public liability insurance or a contractor’s liability policy. Directors of companies, office holders of incorporated societies and trustees of trusts should look to carry directors’ and officers’ cover. When directors consider taking directors’ and officers’ cover, they should review the company’s Constitution because some cover for directors is possible only where the company’s Constitution permits it. It appears that where the company has no constitution, there is a limitation on obtaining directors’ indemnity insurance. In the case of office holders and trustees, the charter documents (eg the rules of the club or the trust deed) may contain clauses that deal directly with the type of cover that can, or more importantly cannot, be taken. Before accepting appointment to a position as a director, office holder or trustee, it is both appropriate and proper to inquire whether directors’ and officers’ cover is available. This may seem overly cautious or may create some awkwardness at the time but it is preferable to being named as a party to an action by a disgruntled shareholder, club member or beneficiary of a trust and being required to fund the defence from your own resources. Company directors

Before taking directors’ and officers’ cover, check whether the company has a Constitution and whether it permits you to take directors’ indemnity insurance. Office holders of incorporated society and trustees of trust Check the rules or the trust deed to ensure that

cover is permitted and whether any exclusions exist. Insurers generally require a significant amount of information for liability cover, including details about the key people within the organisation, financial information and details about the exact nature of the activities undertaken. These policies often contain a significant number of exclusions. Understanding what is excluded is important to ensure that the correct type and level of cover is acquired.

¶405 Purchasing insurance — do you have a legal obligation to take insurance? Taking insurance is generally optional for a business or incorporated society, and they do so as a prudent measure to protect against loss. However, this is not always the case. It is now common for a person or an entity to be required to hold insurance as part of contractual arrangements they have entered into with other parties (eg taking a lease in a mall, tendering for particular types of projects or contractual works or running an activity at a hired venue). Is insurance required?

Where you have leases or written legal arrangements with other parties, you should review these documents to ensure that any obligation to hold insurance is observed. In addition, if you agree as part of a contractual arrangement to hold harmless another party or to indemnify them for their loss, you should consider taking out insurance to help manage this risk.

Example 1 A small retail company takes a lease in a mall. The deed of lease should be checked to ensure compliance with any terms requiring public liability insurance. The lease usually also states the level of insurance required.

Example 2 An electrical contractor takes on a project after successfully tendering for a maintenance programme with a large company. The tender document and contractual terms should be reviewed for any insurance the contractor is required to hold.

¶406 Purchasing insurance — the proposal document This is the document completed by the party seeking insurance. Proposal documents, particularly for liability insurance, are generally quite extensive. They often require significant additional information, such as financial statements and promotional literature. It is important to take great care when completing the proposal document, as this is where full and complete disclosure is required. While the proposal document contains a number of questions, it is important for the party seeking insurance to disclose all relevant information irrespective of whether the proposal document specifically requests the information. Up-to-date valuations for plant and equipment are required, as are the entity’s latest financial statements and information about the organisation’s risk management procedures.

As discussed at ¶402, the party seeking insurance is required to make complete and total disclosure of all relevant and material information. While there are some exclusions which protect against incomplete disclosure (eg information that is in the public domain need not be disclosed), it is inadvisable to withhold information based on your own assessment that it is either in the public domain or is not relevant and material. Broadly, it is the insurer who determines what is material and relevant. While the decision of the insurer can be challenged, this is usually done through the courts and is an expensive and uncertain route to obtain payment under a policy. For a small business, the cost of legal action is often prohibitive and the time frame unacceptably long.

¶407 Key elements of an insurance policy Insurance policies are usually divided into a number of sections. In recent years, insurance companies have taken significant steps to present their policies in plain English and generally make them more readable. While the presentation of policies differs from company to company and for different types of insurance, some sections are common to all policies. Of course, there is no substitute for careful reading of the entire policy and taking advice on those aspects where there is some uncertainty. What is insured? All policies have an insuring clause that states what is covered. This is usually fairly broad and sets out extensions included in the cover. For example, under a public liability policy, an extension may provide cover for exemplary or punitive damages. Exemplary or punitive damages are awarded where there are aggravating elements that warrant not just compensation for the injured party but also punishment of the wrongdoer. Exclusions The policy contains an extensive and specific list of what is excluded from cover. This section must be read carefully and understood. For example, motor vehicle policies usually exclude liability where the car

is in an unsafe or unroadworthy condition. In cases of liability insurance, most policies exclude cover for defects in an insured’s goods, and cover only the damage caused by the product. The cost of replacing the defective goods rests with the insured. Another common exclusion is consequential loss arising from data loss on an information system or other losses stemming from failure of computerrelated equipment. Obligations or conditions on the insured The policy contains a section setting out the obligations of the insured or the conditions of the policy. Again, full and complete compliance with these provisions is required to ensure that the policy is not voided.

Example Mr Green is a contractor who does regular electrical maintenance work at the site of Large Company Ltd. Large Company Ltd has a written contract with Mr Green. One of the terms of the contract is that all on-site work will be undertaken by a person registered as an electrician with the Electrical Workers Registration Board. If Mr Green sends an associated tradesperson, who is not registered as an electrician, to do the work and an accident occurs for which there is subsequently a claim, the policy may be refused for a failure to take all reasonable care to comply with obligations given to the other party.

The insured must also advise the insurer if there is a change in circumstances during the term of the policy. Such provisions are often unhelpful to people who only deal with insurance companies occasionally and it is difficult to provide definitive guidance. It is important to understand the distinction between material information and change in circumstances. Material information that becomes known during the term of the policy does not generally need to be advised to the insurer during the term of that policy (although, on

renewal of the policy, the insured should advise the insurer about this new information). However, where there is a change in circumstances, the insurer must be advised.

Example Mr White has movable plant and equipment which he stores each night and at weekends at a secure, monitored storage facility. The secure storage was discussed with and approved by the insurer. During the year, Mr White has to undertake work some distance away and the plant and equipment must now be stored in an unfenced and unmonitored yard. Such a change very likely constitutes a change in circumstances and Mr White should therefore advise the insurer, who may wish to amend the premium (ie money paid to the insurer) or policy terms for the less secure overnight storage.

Not restricting the insurer’s rights of subrogation One of the risks for an insured person is to ensure they do not limit the rights of subrogation of an insurer. Having paid the insured under the policy, the insurer will look to recover their loss from the third party that caused the insured person’s loss. This is known as subrogation, as the insurer is standing in the shoes of the insured and seeking to recover the loss that has been caused by the third party. The risk for the insured is that they may, inadvertently, limit the rights of the insurer to recover the loss. In such cases, limiting the right of the insurer to recover will invalidate the policy, or, at the very least, limit the cover of the insured party.

Example BWV Incorporated Society contracts with One Time Construction Limited (OTC) to

undertake a $500,000 upgrade of BWV’s hall, which it uses for musical productions and other club events. A term of the contract for the upgrade is that OTC’s liability to BWV for any loss it suffers under the contract for the music hall upgrade shall be limited to $100,000. As a result of OTC’s poor workmanship, the roof leaks; and, in a major rain event, BWV suffers a loss of $250,000. BWV has insurance for a range of events, including material damage arising from weather-related events. However, the insurer may decline to pay out to BWV for its loss, as the insurer’s right to recover from OTC has been limited.

The issue of subrogation is more likely to arise in construction, project or maintenance contracts and care should be taken to ensure such terms are not included or that appropriate advice is taken prior to accepting them. However, if they are included, it is recommended advice is taken with a broker and that the appropriate disclosures are made to the insurer. Priority of insurance funds paid under a director’s and officer’s policy A recent Supreme Court decision (BFSL 2007 Ltd & Ors (in liq) v Steigrad (2014) 10 NZBLC ¶99-714; [2013] NZSC 156) has important ramifications for directors who take out a directors and officers (D&O) policy to indemnify them for liabilities arising from their acts or omissions as directors. In addition to the cover for claims arising from breaches of duty as directors, the policy also covered the cost of defending any actions brought against the directors. These two types of cover, first, to indemnify for breaches of directors’ duties and, secondly, the cost of defending legal proceedings were wrapped up into one D&O policy. The Receivers of Bridgecorp were concerned that all the funds under the policy would be exhausted by the directors’ defence costs. They sought a charge over the insurance monies under the policy. The directors argued that they had a right to the funds under the policy to defend the criminal and civil proceedings being taken against them. The Supreme Court, in a majority decision, found in favour of the Receivers of Bridgecorp. The majority found that it would, as a matter

of policy, be unfair to expect the third party claimants to fund the defence costs of directors, as this depletes the funds available to them to remedy the loss they have incurred. This decision overturned the Court of Appeal decision, which in turn had overturned the High Court decision. The decision has important ramifications for directors and their D&O policies. Directors should now ensure that policies that indemnify them against legal proceedings are separate from policies that provide cover for claims arising from a breach of directors’ duties. In short, directors should make sure there are two separate policies. One will be for the costs of defending legal proceedings. The other will be for indemnities against a breach of directors’ duties. The effect is that the two types of cover should be treated as separate and distinct and not allow them to be mingled.

¶408 Occurrence of an event and making a claim It is important when an event occurs to check your policy to see what action the insured should or should not take. Policies often contain a clause stating that the insurer must be notified as soon as practicable. Difficulties tend to arise where there is liability insurance. For example, liability insurance policies often contain a clause requiring the insured not to admit liability. Therefore, familiarity with your obligations under the policy is important if a claim is being made. You should seek advice from your insurer as soon as practicable about the appropriate response. Another common clause in liability insurance is a requirement to advise the insurer when the insured becomes aware of the possibility of a claim. In such cases, the insured must notify the insurer as soon as possible. Failure to notify can give rise to the insurer declining to pay under the policy. Notifying the insurer about possible claims should not generally cause concern because premiums are based on the number of claims against the insured, not the number of notifications made.

¶409 Renewing an insurance policy Most policies are for a period of one year. On the anniversary, there is a renewal of the policy, which is different from a continuation of the policy. Each time the policy is renewed, the duty of disclosure must be observed again.

¶410 The Insurance and Savings Ombudsman The office of the Insurance and Savings Ombudsman, set up in 1995, is an independent body that deals with complaints about disputes between consumers and insurance companies. It deals with business insurance issues for small businesses only. Broadly, a small business is one that has 19 or fewer full-time equivalent employees and, in the previous two accounting periods, has had net assets of less than $1m or turnover (GST exclusive) of less than $1m.

¶411 Use of an insurance broker For a small business, incorporated society or trust, the advice of an informed and knowledgeable insurance broker is invaluable. Insurance brokers act as the liaison between the party seeking the insurance and the insurance company. They have a comprehensive understanding of the appropriate type of insurance to hold, and which company will have a policy suitable for particular circumstances. Given their knowledge and experience, good brokers also assist in completing the proposal form. This is useful as they have an understanding of the type of information that should be disclosed and know what questions to ask of the party seeking insurance, to assist with full disclosure. Some brokers work on a commission basis, paid by the insurance company that issues the policy, while others are paid on a fee structure. The broker should disclose to the party seeking the insurance how their fees are paid.

¶412 Insurance checklist Figure 4.1: Insurance Checklist

Insurance Checklist List assets to be insured — buildings, plant and equipment, motor vehicles (third-party or replacement value for motor vehicles?). Obtain current values of the assets to be insured from a registered valuer. Engage an experienced insurance broker or industry specialist to assess the risks of your organisation/business. Make sure you have procedures to ensure that full disclosure has been made to the insurer and that nothing material has been inadvertently omitted. Make sure a broker has assessed the requirement for various types of insurance, including: •

business interruption insurance

•

directors’ and officers’ insurance

•

employment-related insurance

•

key person insurance

•

product liability insurance

•

professional indemnity insurance

•

public liability insurance

•

special events insurance (particularly relevant for sports clubs or other organisations holding major one-off events), and

•

specialist assets insurance.

Peruse all contractual documents (eg lease or tender documents) to ensure that the relevant insurance is in place.

✓

Ensure that employees, contractors and suppliers engaged by your organisation are, where appropriate, registered and certified (eg electricians, plumbers and gasfitters, builders and mechanics). If an insurable event occurs, check the policy to identify your responsibilities (eg not admitting liability and informing the insurer as soon as practicable). Make sure you have procedures to ensure that all material information has been provided to the insurer. Make sure you have procedures to ensure that any change in circumstances is communicated to the insurer as it occurs and not just at renewal.

Chapter 5: HEALTH AND SAFETY GOVERNANCE Editorial information

Adrian Olney

¶501 Introduction Health and safety is an important aspect of the governance of any organisation. The impact on those who are harmed at work, their families and colleagues can be immense; and those tasked with governance of an organisation need to take steps to prevent that human cost. However, good health and safety governance may also achieve a broader range of business benefits. For example, a positive safety culture can contribute to increased worker engagement, improve reputation, decrease costs associated with worker illnesses and injuries, decrease levies payable under New Zealand’s accident compensation scheme, and avoid legal liability. For those reasons, it is often said that good health and safety governance makes good business sense, and that financial targets and health and safety go hand in hand. Recent law reform means robust health and safety governance is even more important than it once was. The two key aspects of that reform have been: • The establishment of a new regulatory agency, WorkSafe New

Zealand, to monitor and enforce health and safety compliance in New Zealand. WorkSafe is a better-resourced regulator than its predecessor and has been particularly active in enforcing health and safety legislation since its establishment. • New health and safety legislation. The primary piece of new legislation is the Health and Safety at Work Act 2015, which comes into force on 4 April 2016. The Act significantly increases penalties for corporate entities and individuals for health and safety failures. Importantly, it is not possible to contract out of the Act, nor to insure against fines or infringement fees imposed under the Act (although insurance for defence costs is permitted). In addition to the Health and Safety at Work Act, other legislation such as the Accident Compensation Act 2001, regulations (which are currently being developed under the Health and Safety at Work Act) and codes of practice are relevant to an organisation’s health and safety obligations. Specialist legislation such as the Crown Minerals Act 1991, Electricity Act 1992, Gas Act 1992, and Hazardous Substances and New Organisms Act 1996 regulate health and safety matters in particular industries. Accordingly, you should seek advice about the health and safety framework applicable to your business. While health and safety is important at all levels of an organisation, those in governance positions (including directors) have a critical role to play in guiding the health and safety strategy of the organisation and leading the charge in creating a positive health and safety culture. They also have specific due diligence obligations (explained in more detail below) under the Health and Safety at Work Act. It is important that those in governance positions take health and safety seriously and implement appropriate policies and procedures. The key point to remember is that health and safety is the responsibility of everyone in an organisation.

KEY OBLIGATIONS UNDER THE HEALTH AND

SAFETY AT WORK ACT ¶502 A PCBU’s obligations to manage risk A PCBU is a person conducting a business or undertaking, whether alone or with others, and whether or not that person is attempting to make a profit or gain. While there are some exceptions, most organisations and some individuals (eg self-employed persons) will be PCBUs. For example, PCBUs include businesses, local councils, schools, volunteer organisations that employ staff, and government departments. A PCBU has duties to manage risks under the following conditions: • It engages workers to work for it, whether those workers are working onsite at the PCBU’s workplace, or in some other location. For example, a building contractor will need to manage risks when its employees are working on building sites. • It influences or directs the work of other workers (ie workers not employed by the PCBU). For example, a business that engages a catering company to provide onsite catering services will probably influence or direct the catering company’s workers and so will need to manage risks to those workers. • It manages or controls a workplace, or fixtures, fittings or plant at a workplace. Determining whether a PCBU “manages” or “controls” a workplace is not always straightforward, but it can be generally assumed that a PCBU controls a workplace if that PCBU leases, occupies or is involved in the management of the workplace. • It designs, manufactures, imports or supplies plant, substances, or structures that could reasonably be expected to be used as or at a workplace. For example, a company that designs industrial machinery is required to manage risks that may arise to people using or near the machinery once it is sold or supplied to a customer.

• It installs, constructs, or commissions plant or structures that could reasonably be expected to be used as or at a workplace. For example, a company that constructs a building that will be used as a workplace must manage risks that may arise to people constructing the building, using the building as a workplace, or who are in the vicinity of the building. When seeking to manage risks, a PCBU must eliminate the risk of harm so far as is “reasonably practicable” or, if that is not possible, minimise that risk so far as is reasonably practicable. Risk is “the possibility that death, injury or illness might occur when a person is exposed to a hazard”. It is assessed in terms of “hazards”, which include every actual or potential source of harm. Hazards may include activities, events, situations, substances or people, and may not be readily apparent. Careful consideration is, therefore, required. Accordingly, hazard identification and management must be a key plank of any organisation’s health and safety management plan. Risks to health should be considered just as carefully as risks to safety. Organisations should carefully design a hazard identification and management system.

Once hazards have been identified, one of the key challenges for PCBUs is determining what steps are “reasonably practicable” to prevent harm and what steps are not. As a general rule, the more likely and/or the more serious the potential harm is, the more you will be expected to do to prevent it. In identifying whether a protective step is reasonably practicable, a PCBU must consider the risk, the likelihood of harm occurring as a result of the hazard, the severity of the harm that might result if it does occur, and then determine the available ways of eliminating (or, if that is not possible, minimising) the risk. Only once that is done may the PCBU consider the cost of the elimination or minimisation steps identified, including whether the cost is grossly disproportionate to the risk. The phrase “grossly disproportionate” means that, in practice, only rarely will a PCBU be justified (on account of cost) in failing to

take a step to eliminate or minimise a significant risk once it has been identified. Accordingly, a hazard identification and management system should identify: • what the hazard is • the likelihood of harm arising from the hazard • the nature of the potential harm arising from the hazard • the steps that would be required to avoid the harm, and how effective those steps would be, including by identifying any hazards that might be introduced or increased by the step • finally, the cost of taking those steps (including by reference to any operational benefits to be obtained from taking the step).

¶503 Duty to consult with other duty holders A PCBU’s duties will often overlap with duties of other PCBUs, such as where there are multiple contractors working on the same site. Accordingly, PCBUs must consult, cooperate and coordinate their activities with other PCBUs with which they interact. Each PCBU’s obligations will depend on the level of control that it has over health and safety matters. A PCBU with very little control over the workplace (A) may be able to meet its obligations by ensuring that the PCBU with the most control over the workplace (B) has effective systems in place that will protect A’s workers, and that A’s workers are familiar with B’s systems. In practice, you should make sure that everyone understands who is doing what to manage all risks. You should ensure that your organisation has appropriate policies in place for consulting, coordinating and cooperating with other PCBUs, and that those policies are implemented.

¶504 Officers’ due diligence obligations In addition to the obligations of PCBUs themselves, the Health and Safety at Work Act imposes personal “due diligence” obligations. These apply to “officers”, which specifically includes company directors, but will also include other senior people in governance roles (eg the Chief Executive Officer). This means that there is now an obligation for directors and other company officers to take reasonable steps to: • acquire, and keep up to date, knowledge of work health and safety matters • gain an understanding of the nature of the operations of the PCBU and, generally, the hazards and risks associated with those operations • ensure that the PCBU has, and uses, appropriate resources and processes to eliminate or minimise health and safety risks • ensure that the PCBU has appropriate processes for receiving and considering information regarding incidents, hazards and risks and for responding to that information in a timely way • ensure that the PCBU has, and implements, processes for complying with its health and safety duties • verify the provision and use of the resources and processes outlined above. Some officers (such as volunteers or members of school boards of trustees) are exempt from the due diligence obligations. The duties of PCBUs and Officers work alongside each other and one set of duties does not replace the other. Directors and other officers must ensure that they have a reasonable basis to believe that workplace health and safety is being attended

to by appropriate people supported by appropriate systems and with enough resources. These issues cannot simply be delegated to management.

¶505 Duties of workers and other people at workplaces Workers and other people at workplaces have duties to take reasonable care for their own safety and for the safety of others who might be affected by their actions. They are also required to follow reasonable instructions (and, in the case of workers, policies or procedures) given by a PCBU. You should ensure that workers and other people entering workplaces you control or manage are aware of safety policies and procedures.

¶506 Consequences of failure to comply with health and safety duties PCBUs, individuals and officers may face criminal liability if they breach their obligations under the Health and Safety at Work Act. WorkSafe has three options regarding the severity of any charge. The three levels of severity are: • A failure to comply with a duty under the Act, which exposes an individual to a risk of death or serious injury/illness, where the person is reckless as to the risk. • A failure to comply with a duty under the Act, which exposes an individual to a risk of death or serious injury/illness. • A failure to comply with a duty under the Act. Figure 5.1 outlines the maximum penalty for each potential charge: Figure 5.1: Maximum penalty for each potential charge

Offence

Maximum penalty Individual

Officer or individual PCBU

Corporate entity

Reckless $300,000 plus 5 $600,000 plus 5 $3 million conduct in years years respect of a imprisonment imprisonment health and safety duty that exposes individual to risk of death or serious injury Failure to $150,000 comply with a health and safety duty that exposes individual to risk of death or serious injury

$300,000

$1.5 million

Failure to comply with a health and safety duty

$100,000

$500,000

$50,000

There is also a range of other minor offences for which fines may be payable. As noted above, it is not possible to insure against health and safety fines. Doing so earns a fine, for both parties, of up to $50,000 (for individuals) and $250,000 (for other entities) and the insurance will be of no effect. When dealing with charges, a court may also (or alternatively) make a range of other orders, including for payment of the regulator’s costs in

bringing a prosecution, or that a person publicise details of the offence and the penalties imposed. Remedial orders are also possible, such as reparations, orders requiring offenders to remedy matters caused by the commission of the offence, orders requiring offenders to undertake projects for the general improvement of health and safety, and training orders. A court may also order a person who has committed an offence to stop the offending act, or anything else the court decides is appropriate.

¶507 Designing a compliant governance framework It is important that organisations have a bespoke health and safety management regime tailored to their particular size, industry and risk profile. However, in seeking to meet your organisation’s obligations as a PCBU and your individual obligations as an officer, you should (at a minimum) ensure that: • your organisation’s governance framework supports a commitment to health and safety management • the organisation has sufficient resources to manage health and safety matters appropriately • the organisation has a robust health and safety management system (including robust risk assessment and management procedures) • health and safety performance is appropriately monitored and measured, and • key executives are held to account for health and safety performance. Some suggested practical steps that you may take are outlined in the checklist below (which draw on good governance steps recommended by the Ministry for Business, Innovation and Employment). Figure 5.2: Governance Actions Checklist

Suggested action

Governance framework Ensure that key governance documents (eg Board charter) include a health and safety commitment and set out the role of the governance team in leading health and safety in the organisation. Create a high-level health and safety strategy and policy setting out the organisation’s commitment to health and safety. Consider (depending on the size of your organisation and relevant expertise of the governance team) establishing a health and safety sub-committee, responsible for overseeing all health and safety matters in the organisation (bearing in mind that overall responsibility for health and safety matters cannot be delegated). Create a regular “health and safety” section as a primary section in Board or other meeting papers and ensure that particular focus is given to those matters at meetings. Information could include data on incidents, absence rates, and other exposures to risks, and actions that are being taken. Set health and safety targets for the organisation that are challenging but realistic. Tip: be careful to ensure that the creation of targets does not lead to misreporting of health and safety incidents. Develop health and safety goals on a yearly basis, and undertake regular reviews to ensure that those goals are being met. Include a “health and safety” section in all external reports (eg annual reports).

Check

Resourcing health and safety Ensure that financial targets are not prioritised at the expense of health and safety. Ensure that there are sufficient funds allocated in monthly and annual budgets for dealing with health and safety matters. Health and safety management Develop a risk assessment process for the identification of actual and potential hazards, and steps for addressing those. Risk assessment involves assessing the probability of an incident happening and the potential seriousness if it does happen. Take steps to personally understand the risks that face your organisation and the steps taken to eliminate or mitigate those risks (including by discussing risks with managers and workers). Consider any “best practice” guidance for health and safety management in your industry and ensure management adopts the best practice approach. Implement a reporting mechanism for incidents and near misses so that causes can be investigated and remedied. Outline expectations for reporting of incidents and near misses. Take steps to ensure that risk assessment and incident reporting is actually occurring in the organisation (eg by speaking with team leaders, and conducting site visits). Seek advice from expert advisors as required about health and safety matters. Ensure that management implements procedures for working with other PCBUs, including monitoring their

activities. It may be necessary to insist that other PCBUs comply with your health and safety protocol when working with you. Develop a procedure for investigating incidents and reviewing management actions in response. Ensure that management provides health and safety training to every employee as part of their induction into the organisation. Specific training may also be required for particular roles. Monitoring and measurement Conduct a formal periodic (eg yearly) review or audit of health and safety matters within the organisation (consider using an external consultant to conduct the review). Ensure that management identifies and implements solutions to any issues raised in a formal review or audit. Holding executives to account Link the health and safety goals of the organisation with the job description and performance review goals for senior management. Consider including commitment to and understanding of health and safety matters as a criteria during recruitment processes. Liaise with workers about health and safety matters that may affect them. Regular workplace engagement surveys can be a good tool for seeking employees’ views about health and safety matters. Celebrate health and safety successes (eg by having annual health and safety awards to reward excellent reporting or other successes).

Ask executives to verify key health and safety matters to the Board (eg you could consider holding a regular “health and safety” Board meeting, whereby executives are asked to provide verification documents to the Board).

¶508 Duty to engage with workers A PCBU must engage with workers, so far as is reasonably practicable, on issues affecting their health and safety, and give workers a reasonable opportunity to express their views and contribute to decision making. A PCBU must also allow workers to participate in improving health and safety on an ongoing basis. It is important to remember that engagement with workers goes beyond a legal requirement. Organisations will typically achieve better safety outcomes where workers are involved in health and safety decision-making. Accordingly, you should ensure that your management team implements worker participation procedures that allow workers to be involved in health and safety discussions. The checklist below sets out circumstances in which workers must be consulted under the Health and Safety at Work Act, although nothing prevents employers from consulting with employees on other issues: Figure 5.3: Workers must be consulted about these Health and Safety matters Workers must be consulted about these Health and Safety matters When identifying hazards and assessing risks to work health and safety arising from work carried out or to be carried out, and making decisions about ways to eliminate or minimising those risks. When making decisions about the adequacy of facilities for the welfare of workers.

Check

When proposing changes that may affect the health or safety of workers. When making decisions about procedures for engaging with workers, monitoring the health of workers, monitoring workplace conditions and providing information and training for workers. When making decisions about procedures for resolving work health or safety issues at the workplace. When developing worker participation practices, including when determining work groups. The Act does not specify what tools must be used to achieve worker engagement and participation. However, a PCBU may seek to achieve effective engagement and participation through the use of health and safety representatives and/or health and safety committees (discussed in more detail below). If an issue about work health and safety arises at work, the parties (eg the PCBU and workers involved) must make reasonable efforts to resolve the matter, following which a party may ask the regulator to appoint an inspector to assist the parties.

¶509 Health and safety representatives and committees Workers in an organisation with 20 or more workers in most industries may request that a PCBU elect a health and safety representative. Health and safety representatives have wide functions and powers, including: • representing workers in relation to health and safety matters • making recommendations on health and safety • obtaining relevant information • entering and inspecting the workplace

• issuing a “provisional improvement notice” requiring a person to remedy or prevent a contravention of the Health and Safety at Work Act (following consultation with that person), provided the representative has completed the required representative training • directing that unsafe work cease, after consultation with the relevant PCBU, provided the representative has completed the required representative training • attending training for their role in paid work time. A PCBU will be required to initiate an election for a health and safety representative if a request is made, unless it has fewer than 20 workers and is in a low risk sector. A PCBU is also required to provide information to the representative, and provide time and resources for the representative to carry out that role. Workers or health and safety representatives can also request that a PCBU establish a health and safety committee as a means of involving workers in health and safety matters. A PCBU can only refuse that request if it is satisfied that the PCBU’s worker participation practices are otherwise sufficient, or the PCBU has fewer than 20 workers and is not in a high-risk sector. If it refuses the request, it is required to notify staff of that. In respect of refusals because the PCBU considers current practices are sufficient, the PCBU must provide reasons for its decision and advise workers that they may raise the refusal as part of the issue resolution procedure set out in the Act. If your organisation has 20 or more workers or is involved in a “high risk sector or industry” as decided by regulations, you must offer workers the opportunity to appoint one or more Health and Safety Representatives in an election. If the nature of your business means that it would not be appropriate for one Representative to represent the health and safety interests or

workers, or to be accessible to all workers, you must determine appropriate work groups with their own Representatives.

¶510 Notifiable events Certain “notifiable events” arising out of a PCBU’s business or undertaking must be brought to the attention of the relevant regulator (which will often be WorkSafe, but may be another designated agency). A PCBU who manages or controls a workplace is also required to take steps to ensure that the workplace where the notifiable event has occurred is not disturbed until authorised by an inspector. Figure 5.4 lists notifiable events prescribed in the Health and Safety at Work Act (others may be prescribed by regulations). Figure 5.4: Events prescribed in the Health and Safety at Work Act Event arising out of a PCBU’s business or undertaking Death If immediate treatment (other than first aid) is required for: amputation of any part of a person’s body a serious head injury a serious eye injury a serious burn the separation of skin from an underlying tissue (eg degloving or scalping) a spinal injury the loss of a bodily function serious lacerations

An injury or illness that requires, or would usually require, the person to be admitted to a hospital for immediate treatment An injury or illness that requires, or would usually require, the person to have medical treatment within 48 hours of exposure to a substance Any serious infection (including occupational zoonoses) to which the carrying out of work is a significant contributing factor, including any infection that is attributable to carrying out work: with micro-organisms that involves providing treatment or care to a person that involves contact with human blood or bodily substances that involves handling or contact with animals, animal hides, animal skins, animal wool or hair, animal carcasses, or animal waste products that involves handing or contact with fish or marine mammals Any unplanned or uncontrolled incident in relation to a workplace that exposes a workers or any other person to a serious risk to that person’s health or safety arising from an immediate or imminent exposure to: an escape, spillage, or leakage of a substance an implosion, explosion, or fire an escape of gas or steam an escape of a pressurised substance an electric shock the fall or release from a height of any plant, substance or thing the collapse, overturning, failure, or malfunction of, or damage to, any plant that is required to be authorised for use in accordance with regulations

the collapse or partial collapse of a structure the collapse or failure of an excavation or any shoring supporting an excavation the inrush of water, mud or gas in workings in an underground excavation or tunnel a collision between two vessels, a vessel capsize, or the inrush of water into a vessel. An incident may be a “notifiable event” even if nobody actually gets hurt. It will often be enough that there was a serious risk to a person’s health or safety. ENFORCEMENT AND CLAIMS

ENFORCEMENT AND CLAIMS ¶511 Enforcement under the Health and Safety at Work Act In addition to criminal prosecutions, WorkSafe has other important powers to enforce compliance. Its approach to enforcement will typically be based on levels of risk — it will generally target organisations in high-hazard industries or with significant risks of serious harm. The first stage of enforcement will generally be through a visit from a WorkSafe inspector. Inspectors may enter your workplace at any time, and have wide powers of examination, information gathering and assessment. Inspectors have a range of powers, including the issuing of improvement notices (which require improvements to be made within a specified time period), prohibition notices (which prohibit certain activities until the inspector is satisfied that the concern has been addressed), or non-disturbance notices (which require sites to be preserved). Notices must be displayed in a prominent place at the

workplace. It is possible to have a decision to issue a notice internally reviewed by the relevant regulator (usually WorkSafe). Decisions made by the regulator in relation to notices may be appealed to the District Court. If a person fails to comply with a prohibition notice, the regulator may take remedial actions to make the workplace safe, at the person’s cost. It is also possible for the regulator to apply to the District Court for orders that a person comply with a notice. Alternatively, the regulator may accept an enforceable undertaking given by a person in writing connected with a breach or alleged breach of the Health and Safety at Work Act, which could be an undertaking to fix the problems that have been identified. As outlined above, WorkSafe may also take criminal action against a body corporate or individual who breaches an obligation under the Health and Safety at Work Act.

¶512 Health and Safety and ACC New Zealand’s accident compensation regime provides cover for personal injuries suffered at work. New Zealand businesses are required to pay levies to ACC to fund compensation of workplace injuries in New Zealand, and to support WorkSafe’s activities. Part of the funding for ACC comes from levies paid by employers, which can be a significant cost of doing business in some industries. In return, parties cannot bring claims in New Zealand courts for personal injury. Organisations that have implemented effective health and safety systems and practices in their workplaces may be entitled to participate in one of ACC’s safety management programmes and achieve a discount on their levies of up to 20%. ACC also runs an Accredited Employers Programme, which entitles businesses who agree to provide entitlements and manage claims for their employees’ work-related injuries to achieve a discount on their levies of up to 90%. The Accredited Employers Programme is typically suitable for large employers with large levies, who are able to shoulder more of the burden in relation to protecting their employees’ safety.

The decision as to whether an employer may become accredited is entirely discretionary, and can be revoked at any time. While levy discounts are available, ACC is not a health and safety regulator and cannot tell you whether your business is doing what it needs to be doing to comply with its health and safety obligations. Businesses should not assume that because they have received a discount on their ACC levies that they are necessarily complying with their health and safety obligations — instead, any queries should be directed to WorkSafe.

¶513 Conclusion Following reform of the law, officers (including directors) cannot simply rely on management to take care of health and safety matters. It may be that a company director who takes health and safety seriously will not need to change any of the practical actions he or she took prior to the implementation of the Act to ensure that an organisation meets its health and safety duties. However, directors ought to be aware that they now have specific personal obligations to undertake due diligence to ensure that PCBUs meet their health and safety duties, and could face significant criminal liability if they do not fulfil their obligations. In that respect, the new law is a significant shift from the old law. By making health and safety a board priority, the result should be a more informed and confident management team and, most importantly, a safer workplace.

Chapter 6: TAX PROCEDURE ESSENTIALS Editorial information

Bede Carran

¶601 Introduction Almost all entities and many individuals (referred to as taxpayers) have obligations to Inland Revenue (also referred to as the Commissioner of Inland Revenue). Even a registered charity, which is exempt from income tax, can have onerous obligations to Inland Revenue. A registered charity, or any organisation, that carries on a taxable activity is required to be registered for goods and services tax (GST). If the organisation employs staff or hires independent contractors, it is required to file pay as you earn (PAYE) returns or schedular payments (formerly withholding payments) respectively with Inland Revenue. The purpose of this chapter is to outline key statutory obligations imposed on taxpayers by tax legislation. It does not deal with the interpretation of the numerous and often vexed provisions within the tax legislation (eg the distinction between income (which is taxable) and a capital gain (which is not)). Neither does it deal with the interpretation of other legislation administered by Inland Revenue.

¶602 Tax legislation Broadly, there are three distinct, although related, Acts, which are collectively referred to as the “tax legislation”. They are: • Income Tax Act 2007 • Goods and Services Tax Act 1985, and • Tax Administration Act 1994. It is often said, without exaggeration, that the Commissioner of Inland Revenue (the Commissioner) has greater powers of search and seizure than the police or any other organ of Government. This is largely correct. Every taxpayer should have a great deal of respect for the powers of the Commissioner.

¶603 Obligations imposed on taxpayers It is also important to appreciate that the Commissioner’s powers can transcend the statutory protection afforded by corporate structures. Where the taxpayer is an incorporated entity (eg a company or incorporated society), the obligations imposed on the taxpayer entity are imposed equally on individuals holding key positions within the organisation (see s 147 of the Tax Administration Act 1994). Section 147 explicitly and unambiguously provides for the liability of the corporate taxpayer to be attributed to an employee, agent or officer of a body corporate where the offence was caused by an act done or carried out by, or by an omission of, or through knowledge attributable to, the employee, agent or officer. Individuals have same obligations as corporate entity The key point to appreciate is that individuals with executive or governance responsibilities have the same obligations as the corporate

entity itself.

Example C Ash is the director of Carefree Developments Ltd. Carefree Developments Ltd has failed to file GST returns for the past year. Inland Revenue is now prosecuting Carefree Developments Ltd for its failure to file returns. C Ash is equally liable for Carefree Developments Ltd’s failure to file its GST returns and may also be prosecuted.

It is also important for trustees to appreciate how they are personally exposed to the tax obligations of the trust. Trusts, unlike companies and incorporated societies, are not separate legal entities from the trustee. Broadly, the trustees and the trust are one and the same at law. Therefore, trustees have the same obligations as the trust itself has to Inland Revenue. Trustees can find themselves personally liable for the trust’s failure to file returns and pay tax. Obligations imposed on taxpayers include: • filing returns by the due date • paying the correct amount of tax • retaining certain records for a specified period, and • supplying information and records to Inland Revenue when requested. These are discussed below.

¶604 Obligation to file returns

New Zealand operates what is described as a self-assessment tax regime. This is based on the concept of voluntary compliance. Voluntary compliance does not mean there is discretion in what is required to be filed or paid. Rather, it operates to reduce compliance costs by allowing taxpayers to comply with their tax obligations without coercion from Inland Revenue. Inland Revenue’s audit and investigation functions are obviously important tools in monitoring voluntary compliance. Taxpayers have an obligation to file correct and timely returns for all tax types for which they are registered. The obligation to file is separate and distinct from the obligation to pay the assessed tax. The filing dates for different tax types vary and it is, therefore, important to diarise relevant dates. Further, the filing dates and required frequency for filing can be affected by the size of the organisation. Generally, the larger the organisation, the more frequently it is required to file. For example, where an entity registered for goods and services tax (GST) makes taxable supplies of less than $500,000, it has the option of filing returns every six months rather than every two months. The importance of filing returns by the due date cannot be overstated. Failure to file in a timely manner can result in significant penalties. For example, the penalty for failing to file pay as you earn (PAYE) and goods and services tax (GST) returns by the due date is $250 per return. The obligation to file by due dates exists even when a refund is owed. Generally, the Commissioner of Inland Revenue grants some leniency for first-time offenders who otherwise have a good record of compliance. However, this is not usually granted for subsequent breaches. The prudent approach is to identify the filing dates for the relevant tax type. You can obtain due dates from Inland Revenue or a chartered accountant. These should be diarised to ensure there is no misunderstanding of the due dates for filing.

¶605 Obligation and responsibility of person signing the return

There is frequently an element of confusion regarding the responsibility for returns filed by the taxpayer. Essentially, a simple principle should be applied. The person signing any return takes responsibility for the accuracy and completeness of the return. While there are some exceptions, these are limited. The issue of responsibility for returns assumes considerable importance for organisations where the return is compiled by one person and signed by another. This is often a practice adopted by notfor-profit organisations (eg incorporated societies and charitable trusts). Frequently, one person is responsible for preparing tax returns (eg goods and services tax (GST), pay as you earn (PAYE) and income tax returns) while another member signs the returns. Often adopted as an internal control, this practice has considerable merit. However, if you are the person signing the return, you can and should adopt a number of precautions. First, make sure you are acquainted with the contents of the return. Examine or inform yourself about the workings that form the basis of the return. For example, there should be a work paper supporting the amounts in the return. Secondly, ensure that you are sufficiently familiar with the operations of the organisation to be comfortable that the return is accurate. Thirdly, all returns should be approved at a committee meeting of the organisation, preferably prior to filing. If this is not possible, make sure the accuracy and completeness of the return are ratified at a subsequent meeting. Finally, ensure that there is a resolution recording who will sign the return on behalf of the organisation. Complicated legal issues can arise where a person signing a return is doing so as agent for another person (referred to as the principal). The basic premise is that the agent should have unqualified confidence in the accuracy of the contents and completeness of the tax return he or she is signing. Anything short of this potentially exposes the agent to significant tax risk.

¶606 Obligation to pay tax It is axiomatic that a taxpayer has an obligation to pay the assessed tax. Interest and penalties are imposed where there is a failure to pay by the due date. These are imposed immediately and can be significant. Taxes such as pay as you earn (PAYE) and goods and services tax (GST) are due on the same date as the return. More complicated payment obligations exist when a taxpayer is liable to pay provisional tax. Broadly, provisional tax is a prepayment of the income tax expected to be paid by the taxpayer. Underpayment of provisional tax can give rise to penalties and interest. However, there are a number of mechanisms available to taxpayers to mitigate the imposition of penalties and interest for underpayment of provisional tax. These include pooling with taxpayers who have overpaid and paying provisional tax based on the level of GST paid. Like all tax matters, the devil is in the detail. Given the complexities of these regimes, it is advisable to take the advice of a chartered accountant on utilising these mechanisms.

¶607 Liability for unpaid taxes The issue of liability for unpaid taxes is complex. A question that is frequently asked is whether individuals can be liable for a corporate entity’s tax defaults. Where a corporate taxpayer defaults on tax payments, a number of factors are relevant in assessing whether liability is imposed on the entity’s key individuals. These include: • the nature of the unpaid tax (eg whether it is unpaid goods and services tax (GST), pay as you earn (PAYE), income tax or some other tax such as resident withholding tax (RWT)) • the type of entity that owes the tax (eg an incorporated society, company or trust), and • the culpability of the individuals involved. It is important to be aware that GST and PAYE are taxes collected by

one taxpayer and paid to Inland Revenue on behalf of another taxpayer. PAYE is the income tax an employee pays on their earnings. It is collected and is paid to Inland Revenue by the employer on behalf of the employee.

Example A charitable trust employs two staff. PAYE is deducted from the wages of the staff. Both are registered with the KiwiSaver scheme. The PAYE collected and passed on to Inland Revenue comprises, in fact, the tax payments and KiwiSaver contributions of the staff. Consequently, this is not the employer’s money. It is, in effect, money held on trust until such time as it is paid over to Inland Revenue.

Personal liability for organisation’s unpaid taxes

It is generally unwise to assume that, as an officer of an incorporated society, trustee of a trust or director of a company, you have no personal liability for unpaid taxes. There can in fact be liability. In a number of cases the Commissioner has successfully pursued those holding responsibility for an organisation for unpaid taxes.

¶608 What to do if a mistake is identified? Despite the best efforts, mistakes and errors can occur in the compilation and filing of tax returns. Where an error is discovered, a good deal of care should be exercised. The Commissioner’s obligation

under s 6A of the Tax Administration Act 1994 is “to collect over time the highest net revenue that is practicable within the law”. If an error is identified, this does not detract from the obligation to file corrected returns and pay the correct amount of tax. Penalties and interest are usually added. The Commissioner’s capacity to remit penalties is prescribed by law, and discretion is limited. Interest is charged to reflect the fact that the taxpayer has had the use of the money, not Inland Revenue. Consequently, the Commissioner’s power to remit interest charged on overdue tax is particularly limited. If the error results in anything other than a trivial amount of additional tax to pay, you are strongly advised to consult a chartered accountant or lawyer urgently. First, the nature of the error and the extent of the liability must be established. Secondly, there are significant concessions for penalties and liability if a voluntary disclosure is made to Inland Revenue. A voluntary disclosure is a notification to Inland Revenue that errors have been made and identified. There are prescribed requirements to ensure that a voluntary disclosure satisfies particular legislative provisions. It is not sufficient to state in a voluntary disclosure that there is outstanding tax (eg GST) without specifying the type of tax, the period in which the error or omission occurred and quantifying the amount of additional tax to be paid. The disclosure requirements must be observed to ensure full advantage is taken of any available remission in penalties. The range of penalties that can be imposed reflects the culpability of the taxpayers for the identified error. It is unwise to endeavour to appraise the nature of the error yourself. This exercise should be left to a professional with expertise in resolving tax disputes with Inland Revenue.

¶609 Record-keeping and requirement to allow Commissioner to inspect Not surprisingly, extensive record-keeping requirements are imposed

on taxpayers (Tax Administration Act 1994, s 22). The purpose of these is to allow the Commissioner to ensure that taxpayers comply with their tax obligations. The term “records” is widely defined. It covers both electronic and hard copy books of account, bank statements, receipts, invoices, credit card statements and other documents necessary for the taxpayer’s returns to be investigated and verified. For example, records include details of payments made and the source of income received. Computer hard drives, along with any back-up, are also captured within the term “records”. When accessing a hard drive, the Commissioner is not obliged to assess which files are relevant but can, where appropriate, take the entire hard drive to conduct the forensic examination. Records must be kept for a period of at least seven years from the end of the income year to which they relate. The Commissioner may extend the period if the taxpayer is under investigation. The Commissioner has extensive powers of discovery (ie the right to ask for documents) and search. These powers are contained in s 16 of the Tax Administration Act, which begins as follows: Notwithstanding anything in any other Act, the Commissioner or any officer of the Department authorised by the Commissioner in that behalf shall at all times have full and free access to all lands, buildings, and places, and to all documents, whether in the custody or under the control of a public officer or a body corporate or any other person whatever … Recent case law has confirmed the extensive powers of search granted to the Commissioner (see Avowal Administrative Attorneys Ltd v District Court at North Shore1. Section 17 of the Tax Administration Act compels taxpayers to provide requested documents to the Commissioner. Again, the powers granted by this provision are wide ranging and extensive. Essentially, they provide the Commissioner with the power to seek any document she believes is relevant. It is important to keep in mind that this includes records held by other parties (eg banks), which is referred to

as “non-party discovery”. While the Commissioner has extensive powers of search and seizure, she must use them reasonably. In fact, it is rare for the Commissioner to conduct requests for information using the full powers of search and seizure contained in s 16. Use of the full powers is reserved for instances where the taxpayer is being obstructive and difficult. Usually the Commissioner issues requests by letter specifying the required information and time frame. Seek legal advice on requests for information

If a taxpayer receives a request for information from the Commissioner, it is advisable to take legal advice on the effect of the request. Failure to comply can result in criminal proceedings being issued against the taxpayer. Where the taxpayer is a trust or a legal entity (eg a company or incorporated society), the trustees, directors and officers respectively can also be joined in the action. Footnotes 1.

Avowal Administrative Attorneys Ltd v District Court at North Shore (2010) 24 NZTC 24,252; [2010] 3 NZLR 661 (CA), Tauber v C of IR (2012) 25 NZTC ¶20-143; [2012] 3 NZLR 549 (CA).)

¶610 Disputes with Inland Revenue Inland Revenue’s decisions and assessments can, of course, be challenged. The provisions governing disputes with Inland Revenue

are contained in the Tax Administration Act 1994. Taxpayers have a number of options for challenging decisions and assessments of the Commissioner of Inland Revenue (the Commissioner). These include submitting a “Notice of proposed adjustment” (IR770) asking the Commissioner to reconsider the decision. Perhaps surprising to some people, Inland Revenue’s own review process is conducted objectively and taxpayers can expect a fair hearing. Taxpayers must understand, however, that, when disputing decisions and assessments, they must observe inflexible time frames and stringent procedural requirements. The Commissioner argues that there is no capacity to consider applications outside the statutory time frames. Inadvertence, even on the part of a paid adviser, does not constitute grounds for leniency. Failure to observe time frames may mean that a taxpayer forfeits the right to contest an assessment, even if there is considerable merit to their argument. Following proper process is critical in disputing tax assessments. Advice of professional tax specialist is invaluable The advice of a professional tax specialist when dealing with tax or other disputes with the Commissioner is invaluable. Tax law is complicated. Added to this are the numerous court cases that have shaped the interpretation of tax law and the strict and inflexible time frames for filing returns and disputing assessments. Tax specialists can provide guidance on the procedure and time frames to be adopted. Frequently, they can also provide an objective and independent assessment of the merits of any challenge, and the risks associated with an audit or investigation.

¶611 Use of the Inland Revenue website and its

resources Inland Revenue has a number of guides on its website to assist taxpayers understand and meet their obligations. It has guides on completing income tax returns, goods and services tax (GST), pay as you earn (PAYE), fringe benefit tax (FBT) and guides on a range of other tax issues. These guides include explanations of the tax types, worked examples showing how to calculate the tax and advice on how to meet the tax obligations of the particular tax type. The web address is www.ird.govt.nz.

¶612 Tax essentials checklist Figure 6.1: Tax Essentials Checklist Tax Essentials Checklist Identify the tax types for which you should be registered. Diarise the filing and payment dates for each tax type. Keep copies of all returns filed with Inland Revenue. Ensure that all financial records are maintained and stored for the statutory seven-year period (this includes electronic record storage). Where returns are signed by an officer or executive of an organisation, ensure that there is appropriate authority for the person signing. If the entity is a trust or not-for-profit organisation, ascertain whether the return has been approved by the committee or trustees at a meeting.

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Chapter 7: AUDITS Editorial information

Marnus Beylefeld and Bennie Greyling

¶701 Introduction Organisations deal and interact with a wide range of parties, both inside and outside the organisation. Whether they are suppliers, financiers, regulators, employees, directors or potential investors, all these parties want assurance that the information they rely on is reasonably accurate, or at least free from material error or fraud. The most conventional way of providing that assurance is by way of an audit. Audits have now become an integral part of the corporate governance landscape and those charged with governance duties should be familiar with them. The definition of “auditor” is very wide and, in this book, refers to someone who performs audit or assurance services, such as inspection, review, inquiry, recalculation or verification of information.

¶702 What is an audit? Essentially, an audit is an evaluation that aims to ascertain with reasonable certainty that the information being audited (whether financial or non-financial, whether historic or prospective) is valid and reliable.

Traditionally, audits were predominantly conducted to evaluate financial and accounting information but the concept of audits has since evolved and has been adapted to provide assurance in many other financial and non-financial areas. For example, audits can be carried out on: • budgets and forecasts • health and safety practices • human resources practices • governance practices. Audits can be conducted by an external party, such as an audit firm, or they can be undertaken internally by people within the organisation itself. The results from internal and external audits may be differently perceived. The findings and conclusions from an internal auditor are generally considered to be less objective than those of an external auditor. External auditors are required to maintain and adhere to strict independence of mind and appearance. Reference to audits required by law usually means external audits. Financial audits The overall aim of financial auditing is to help organisations maintain the integrity of their external financial reporting. External auditors must be able to provide an independent, objective and professional opinion and are required to follow a number of standards in conducting their audits. To do this, they require full, unimpeded access to relevant information and to the personnel involved in the matters being audited. An audit will not provide absolute assurance that the material audited (eg financial statements) is entirely free of error or fraud. To reach such a level of assurance, the auditor would have to verify every transaction in which the organisation had ever been involved, as well as every action the organisation had ever taken. The impracticability of this is obvious. General financial statement audits are not primarily aimed at

specifically identifying instances of fraud, although the auditor will be on the lookout for possible indications of fraud that come to his/her attention during the audit process.1. Auditors have to rely, to some extent, on the evidentiary information they find and the information and explanations presented to them by management. They cannot treat every invoice, statement or document as potentially forged or fraudulent. Your organisation’s type and level of financial reporting will largely be dictated by the requirements of statutory legislation (eg the Financial Markets Conduct Act 2013, the Financial Reporting Act 2013 and the Companies Act 1993 (as amended)). Not all organisations need to be audited. There has recently been a significant overhaul of the financial reporting and auditing requirements in New Zealand with the introduction of a number of new and revised pieces of legislation. These changes provided both relief from audit and financial reporting requirements to some types of organisations (eg certain small companies) as well as introducing an audit requirement to organisations that have historically not had audit and financial reporting requirements (eg certain partnerships and charitable organisations). You should liaise with the relevant regulator (eg Companies Office, Charities Services or the Financial Markets Authority, etc) or seek legal advice about your organisation’s specific audit and financial reporting requirements. (See chapter 12 for more information about the requirements of the Companies Office.) Generally, s 207 of the Companies Act requires the appointment of an auditor for some companies. Companies that are deemed to be “FMC Reporting Entities” — typically entities deemed to have a certain level of public accountability by the Financial Markets Authority either due to the nature of their business or because they have obtained public finance though shares or debt issues to the public — have stricter audit and financial reporting requirements than other entities. Refer to the FMA’s website (http://fma.govt.nz/compliance/financial-reporting/who-needsto-comply/). For example, the Financial Markets Conduct Act specifies that certain entities’ financial statements must be audited by a “licensed auditor” (a “licensed auditor” is an auditor who has been

specifically designated by the FMA to conduct certain audits). Your organisation may have audit requirements that do not emanate from any legislation, but exist as a requirement of your bank, the Government, your constitution, your shareholders’ agreement, rules (for an incorporated society) or your trust deed. Remember that, by law, the directors are responsible for preparing and presenting your financial statements. The auditors do not have any obligation to prepare or present the financial statements; and, in some cases, are expressly prohibited from preparing your financial statements. Their job is to evaluate the financial records and provide assurance that they are valid and reliable. Key points to bear in mind

It is important to remember: • There is a cost attached to engaging an external auditor and this must be considered and budgeted for. • Your external auditor of choice must be independent. • You must liaise with your auditor and the relevant regulators about when and how your audited financial statements are to be lodged or filed (if required) — see “Registering your financial statements” on the Companies Office website: www.business.govt.nz/compliance/financialreporting. • You must allow enough time for completion of the audit and resolution of any issues that arise so that any internal or external deadlines can be met.

Audits of budgets/forecasts (Prospective financial information) An audit of budgets/forecasts provides assurance over the robustness of management’s forecasting process as well as the reasonableness of the assumptions made about future earnings etc. Although these types of audits are generally carried out under regulation when a company intends to make an investment offer to the public (eg such as listing on a stock exchange), it can also be a useful tool for directors when relying on internal management budgets and forecasts to make strategic decisions about the organisation. Typically, these types of audits are complex, as it involves making judgments about future events. Human resources audits Human resources audits can be done internally or by an external firm and essentially entail the same process as a financial audit. The human resources audit evaluates your organisation’s human resources processes and management function. The auditor will measure your organisation against the applicable legal requirements and your company’s policies or generic best practices, as applied in New Zealand. Following this, the auditor may be asked to express an opinion on your organisation’s human resource practices and policies. Health and safety audits Health and safety audits can be conducted internally by your own people or by external auditors who will measure your organisation’s processes and procedures against the relevant health and safety requirements in New Zealand. Following this, the auditor may be asked to express an opinion on your organisation’s Health and Safety practices and policies. Governance audits See chapter ¶15 for information on governance audits. All audits, financial or non-financial, typically follow a similar process and needs to meet a range of specified standards. For more information on the

auditor’s specific auditing standards, refer to the website of the External Reporting Board (XRB): http://xrb.govt.nz/Site/Auditing_Assurance_Standards/Current_Standards/Auditing Footnotes 1.

See, generally, New Zealand Auditing and Assurance Standards Board ISA (NZ) 240 “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements” (updated April 2014).

¶703 The audit process This discussion of the audit process focuses on the financial statement audit, which has become the template for all other types of audits. Directors and others involved in corporate governance are more likely to be familiar with financial audits. Audit evidence The audit process involves the auditor obtaining evidence about the assertions made by the organisation in relation to its financial results, budgets, forecasts, human resource practices or health and safety practices. Auditors can obtain this evidence by performing a series of different tests, generally categorised as either control tests or substantive tests. Control tests provide the auditor with evidence about the design, implementation and effectiveness of controls of the organisation and, in particular, those controls that are relevant to the subject of the audit (eg the financial reporting controls). Essentially, the auditor assesses certain policies and procedures of an organisation to ascertain whether internal controls are in place and are working. Regardless of the results of the control tests, the auditor is generally still required to perform a level of substantive testing.

Substantive tests are conducted to obtain detailed evidence about specific assertions made by the organisation. Auditors use these tests to gather evidence by: • inspecting relevant records or documents • observing aspects of company practice relevant to the test (eg watching staff perform certain procedures) • communicating verbally and in writing with parties inside and outside the organisation (it should be noted, however, that the auditor is always required to substantiate internal explanations with further substantive tests) • recalculating the organisation’s calculations • sourcing documented confirmation of details about the organisation from external parties • re-performing procedures undertaken by the organisation, and • analysing information in light of the auditor’s understanding of the organisation’s business.

Example ABC Co Ltd prepares monthly bank reconciliations. This is a form of control implemented by the organisation. The auditors may test these bank reconciliations as follows: • They may discuss the design of the bank reconciliation control with management. This allows the auditors to form a view as to whether the control is useful and if it mitigates the risks as intended. • They may inspect one month’s bank reconciliation to ensure that the control was actually implemented during the period being audited. • They may inspect a sample of monthly reconciliations to ensure that the control operated effectively. When conducting this test, the auditors check to ensure that the correct inputs were made to the reconciliation and that all

the individuals who were supposed to review the reconciliation actually did so. If the auditor is satisfied with the control tests, he or she will place more reliance on the information provided by the monthly reconciliations and reduce the level of their substantive testing over the bank balance. If ABC Co Ltd claims that it has $100,000 in the bank at year-end, the successful results of the control tests support that assertion. On this basis the auditor may be able to substantiate the existence of the $100,000 in the bank by inspecting the bank statements or contacting the bank for a formal confirmation (ie these constitute substantive tests by the auditor).

Materiality An audit allows the auditor to assess whether he or she believes the financial results are free from material error (or whether the health and safety processes or the human resources management function, for example, is at risk of material non-compliance with law or regulation). As already mentioned, it is virtually impossible for the auditors to provide absolute assurance that your financial results are flawlessly accurate and correct. Audits will thus only convey a certain degree of assurance. The audit process is designed to identify material misstatements or material non-compliance. Materiality, as applied by auditors, is a subjective measurement used to consider what level of non-compliance or misstatement they can tolerate, without it affecting their level of assurance expressed.

Example An organisation’s auditor considers quantitative materiality for the organisation to be $50,000. Generally, therefore: • The auditor would conduct audit procedures to identify errors that could accumulate over and above that threshold only. • If the sum of all errors the auditor finds is below $50,000, he or she could

potentially disregard those errors when forming the audit opinion. This would, of course, still depend on the nature of the errors — for example, an error that results from fraud, irrespective of quantum, may well affect the audit opinion. • Balances or transactions below $50,000 could be subjected to fewer audit procedures than other balances and transactions. • The lower the quantitative level of materiality, the more items are likely to be sampled in the audit (all other factors being equal). Remember that the entire audit process relies on the professional judgment of the auditor and his or her audit methodology. The points outlined above may not be appropriate in all situations.

As a rough guide, auditors often use guidelines such as those listed below as a starting point in determining the quantitative level of materiality. Figure 7.1: Guidelines for Determining Quantitative Materiality Lower Limit

Upper Limit

Revenue

0.5%

2%

Total assets

0.5%

5%

Profit before tax 5%

10%

You may ask your auditor what value he or she has used to calculate materiality for your organisation.

¶704 Engaging an auditor The auditors will require a formal letter of engagement setting out the terms and scope of the procedures you wish them to perform. These terms may vary according to the purpose for which their opinion is required. Human resources and health and safety audits are likely to be

restricted to aspects relating only to those areas and will require a different scope of engagement. The formally agreed engagement letter should address the following points:2. • the objective and scope of the audit to be performed • an identification of the applicable financial reporting framework under which the financial statements will be prepared • what the organisation must do to promote the audit’s expedient and efficient conclusion (ie the responsibilities of the directors), including: — which documents or what information will be made available to the auditors, and — who the organisation will nominate to deal with queries and liaise with the auditors • what the deliverables from the auditors will be (this generally includes a formal audit opinion and a “management letter” setting out the audit findings — the deficiencies they identified and recommendations they suggest) • a timeline, which should be a critical part of the terms, and • logistical arrangements for the audit and whether there is any need to involve other auditors. The value of quantitative materiality should preferably not be included in the engagement letter as it could be considered a formal limitation on the scope of the auditor. Key points to consider before engaging the auditor For any audit, it is important to consider the

following issues: • The organisation should formally agree in writing the terms of engagement with the auditor it has selected. • Decisions about the terms of the audit should be made by the Audit Committee and should be an agenda item at a board meeting. • The organisation may ask its legal adviser to review the auditor’s engagement contract before signing it. • If you are uncertain about the auditor’s terms or requests, you can contact Chartered Accountants Australia New Zealand for clarification (www.nzica.com/contactus.aspx). Footnotes 2.

See New Zealand Auditing and Assurance Standards Board ISA (NZ) 210 “Agreeing the Terms of Audit Engagements” (April 2014) at [9]–[12].

¶705 What auditors are looking for? Auditors are most familiar with the annual statutory financial statement audit. For this type of audit, the organisation must provide information about: • the financial results of the organisation, including: — trial balance — general ledger, and — financial statements

• documentation supporting the financial results, including: — bank statements — invoices — receipts — goods received notes — fixed asset registers — inventory lists — contracts, and — debtors and creditors statements • internal control documentation, including: — account reconciliations — budgets and forecasts, and — minutes of meetings. The auditors will need to speak to staff, management and the directors about the information supplied. The auditors may seek your permission to contact third parties in order to substantiate your financial information. Bear in mind that when auditors evaluate financial information, they are generally concerned with establishing audit evidence about six attributes of your financial results, namely: • completeness • existence or occurrence • accuracy

• valuation • ownership or rights and obligations, and • presentation or disclosure of financial results.

Example The auditors are concerned with the following assertions about XYZ Co Ltd’s financial results:

Completeness

Is all of XYZ’s revenue recognised? Are all XYZ’s liabilities recorded?

Existence or occurrence

Did the sales giving rise to the revenue actually occur? Does XYZ’s factory in Mauritius actually exist?

Accuracy

Are the sales recorded in the correct period and for the correct amount?

Valuation

Are XYZ’s fixed assets actually worth $1m?

Ownership or rights and obligations

Do the fixed assets listed actually belong to XYZ and not to someone else? Is the organisation actually obligated or liable to the bank under the terms of its loan agreement?

Presentation

Do the financial statements correctly disclose the relevant information? Are the financial statements in line with the required accounting standards?

¶706 The organisation’s controls The policies and procedures an organisation has in place are often called the “controls” or “internal controls”. Auditors may include an assessment of your organisation’s controls in their audit. This means that when they are looking at your financial information, health and safety compliance or human resources management, they may first establish what your organisation has done to ensure that those areas are free of material misstatements and to manage risk. They will comment on the controls in the “management letter” they prepare on completion of the audit (see ¶707). There are countless possible controls and your organisation will design and implement controls that fit its needs from a vast range of possibilities.3. You need to understand the controls that your organisation has in place and take the following steps: 1. Ensure that your policies and procedures (ie controls) are documented so that the auditors can inspect these documents. 2. Familiarise yourself with the organisation’s controls and where these apply to you as a director. 3. Regularly monitor the controls and follow up on any breaches or issues of non-compliance. 4. Document the results of your monitoring as well as the corrective steps you have taken. One of the most important aspects of control which concerns directors is the general control of “monitoring”. Monitoring can involve: • having a well designed and implemented risk management policy with risk maps and regular risk assessments (see chapter ¶11 for more information on risk management) • implementing an internal audit function to analyse and assess internal controls on an ongoing basis

• review and monitoring of audit services (internal and external) by the Audit Committee • self-assessment by the board in the form of governance audits (see chapter ¶15 for more information on governance audits) • regularly monitoring any breaches of controls, policies or procedures and taking appropriate action • implementing review procedures as part of the organisation’s processes (see procedures 4 and 5 in the example below), and • establishing a formal “whistle-blowing” process for reporting internal control breaches.

Example ABC Co Ltd establishes controls over the use of its company credit cards, as listed below. Procedures 4 to 6 are monitoring controls in that they implement “review procedures” in the organisation’s controls. The directors should take heed of the controls that require their involvement (eg number 6 below). ABC Co Ltd: Credit card controls Control details 1. Only department heads will be issued with a credit card, which will have a limit of no more than $1,000. 2. All employees with company credit cards must submit a monthly expense form, before the 5th of every month, to the financial accountant, attaching: • receipts for all purchases in the month, and • explanations for all expenses in excess of $10. 3. The monthly expense forms will be reconciled against the individual credit card statements by the financial accountant before the 10th of every month. 4. The financial controller will review and sign the accountant’s reconciliation as evidence of his or her review by the 15th of every month. 5. The financial controller conducts “spot-checks” on an ad-hoc basis. 6. The directors will review the credit card expense total against the budget during every board meeting.

Footnotes 3.

For more detail on internal controls, you can: • read “Internal control over financial reporting — Guidance for smaller public companies: Frequently asked questions” published by the Committee of Sponsoring Organisations of the Treadway Commission (COSO) (www.coso.org/documents/SB_FAQs.pdf) • consult the “Guidance on Internal Control” page on the COSO website (www.coso.org/IC.htm) • consider the auditors’ recommendations contained in their “management letter” (Refer [¶707]) • do an Internet search (eg using Google) for “internal controls”.

¶707 Audit findings As part of the audit contract, the auditors will deliver a formal audit opinion that accompanies the financial statements. They may also deliver their audit findings in a management letter or more informally (eg as a verbal report during a meeting with the board of directors). Audit opinion When the auditors have obtained the evidence they require, they can form a view about the organisation’s financial results. The formal expression of that view is known as the audit opinion. The audit opinion generally falls into one of the following categories:

• an unqualified opinion that the organisation’s financial information is presented fairly in all material respects • a qualified opinion that the information is presented fairly apart from a number of exceptions • a disclaimer of opinion because the auditor could not obtain the audit evidence that he or she required to form a view, or • an adverse opinion stating that the information is not fairly presented in all material respects. The audit opinion is generally only a couple of pages long and should accompany your financial statements if you disclose them to the market. Management letter If you want more than just the formal audit opinion, you can request the auditors’ findings on the tests they performed and any recommendations they may have made. This information is often referred to as a management letter. The management letter explains to the directors the deficiencies identified by the auditors that could have an impact on the organisation’s performance and what needs to be done by management to remedy those deficiencies. A management letter may include comments from the auditors as well as comments from the organisation’s management about the identified control deficiencies. An audit may identify deficiencies in the organisation’s control environment or in the design, implementation or effectiveness of controls. The auditor is only able to report on internal controls examined as part of the audit and, therefore, the management letter may not necessarily mention all control deficiencies. The management letter generally follows a standard format: • identification of deficiencies • description of the severity or likely impact of each deficiency

• explanation for deficiencies given by management • how management told the auditors they intend to remedy the deficiencies identified, and • the time frame for this remedial work.

¶708 Plan to Remedy When you have reviewed the audit findings, you should document your response by drafting a “Plan to Remedy”. This plan sets out details of each deficiency identified, how it affects the organisation, what needs to be done to remedy it, when it will be remedied, and who will be responsible. In drafting the plan, you should: • discuss the audit findings with your organisation’s management to inquire why the deficiencies occurred • consider the possible effect of the deficiencies identified (by assessing their priority and the auditor’s recommendations) and, depending on their seriousness, decide whether the auditor’s recommendations will be implemented • assign a person responsible for remedying the identified deficiencies, and • assign time frames for the remedial action and monitor these at subsequent board meetings. In subsequent audits, or after a predetermined period, establish whether the deficiencies have been appropriately remedied. Some deficiencies are merely cosmetic and have a less significant impact on your organisation than others. In determining whether a deficiency is significant, auditors may give attention to considerations listed in Figure 7.2 below. These are only examples and the final evaluation depends on the auditor’s professional judgment. Directors can also use these criteria to assess the seriousness of the deficiencies.

Figure 7.2: Determining whether deficiency is significant When assessing whether a deficiency is significant, ✓ auditors may consider the following matters outlined in the International Standard on Auditing ISA (NZ) 265: 4 See New Zealand Auditing and Assurance Standards Board ISA (NZ) 265 “Communicating Deficiencies in Internal Control to Those Charged with Governance and Management” (April 2014) at [A6]. The likelihood of the deficiencies leading to material misstatements in the financial statements in the future. The susceptibility to loss or fraud of the related asset or liability. The subjectivity and complexity of determining estimated amounts, such as fair value accounting estimates. The financial statement amounts exposed to the deficiencies. The volume of activity that has occurred or could occur in the account balance or class of transactions exposed to the deficiency or deficiencies. The importance of the controls to the financial reporting process, for example: •

general monitoring controls (such as oversight of management)

•

controls over the prevention and detection of fraud

•

controls over the selection and application of significant accounting policies

•

controls over significant transactions with related parties

•

controls over significant transactions outside the entity’s normal course of business

•

controls over the period-end financial reporting process (such as controls over non-recurring journal entries).

The cause and frequency of the exceptions detected as a result of the deficiencies in the controls. The interaction of the deficiency with other deficiencies in internal control. Implementing controls to safeguard your organisation’s assets is a fine balancing act between allocating scarce resources for control purposes and employing them to conduct the organisation’s business. In that sense, audits provide an invaluable assessment of which controls are the most important to remedy or implement. Figures 7.3 and 7.4 are examples of Plans to Remedy that address control deficiencies identified in a financial statement audit and a human resources audit respectively. The same principles can be followed for most types of audit findings. Figure 7.3: Plan to Remedy Example: Financial Statements Audit Findings

Organisation’s Re

Deficiency Found

Effect

Recommendation Priority Remedy

Segregation of duties: The person responsible for taking cash receipts is the same person responsible for recording cash receipts and

Segregated duties improve control over cash receipts and mitigate risk of fraud or error in the recording of cash

Person X should Medium We cannot yet accept cash in the afford to appoint presence of two more staff Person Y and both members. should sign on the Management will cash receipt to be rather inspect recorded by cash receipt Person Z. Person records on an ad X should not have hoc basis. any access to

following up receipts. on outstanding debtors.

debtors’ ledgers or any duties to control those balances.

Customer complaints: Customer complaints are dealt with by the sales department.

A potential conflict of interest could arise as those being complained about would be those tasked with resolving complaints.

Assign the formal handling of customer complaints to the chief executive officer.

Medium Accept auditors’ recommendation.

Bank reconciliations: Bank statements are not regularly reconciled to the general ledger.

Errors could go unnoticed for an extended period and this could impact on cash flow.

Bank reconciliations should be performed by Person A and reviewed by Person B on a monthly basis.

High

Accept auditors’ recommendation.

Incorrect GST: We notice that in February 2015 GST was claimed at 51% on Invoice 000011.

Possible customer complaint and noncompliance with legislation.

We recommend this instance be followed up and resolved.

Low

This was a oneoff instance and will be avoided in future.

Filing of invoices: We notice that hard-copy

Possible risk that invoices could be missed for

We recommend all Low creditors’ invoices be filed in numerical

Accept auditors’ recommendation.

invoices are not always filed sequentially.

payment. sequence. Finding these could waste employee time.

Harassment: The company has no preventative measures in place to prevent or deter such practices.

This could constitute noncompliance with statutory requirements.

Appropriate procedures for dealing with incidents of harassment should be developed and provided to all employees.

Special leave: The allowance of special leave on the basis of sickness or bereavement is currently a matter of individual management discretion and no formal policy exists.

This could constitute a breach of legal requirements.

Implement a policy Medium Accept audit to ensure that recommendation individual and implement managers comply within the Staff with the relevant Guide. legislation.

High

Accept audit recommendation and implement immediately.

¶709 Audit Committee Terms of Reference The Audit Committee exists to assist the board in carrying out some of its duties. Principles of corporate governance for which the Audit Committee could take responsibility can be found in the FMA handbook

“Corporate Governance in New Zealand: Principles and Guidelines”.5. The principles relating to auditors and audit committees are discussed further below. Guidelines • The board should inform itself fully on the responsibilities of external auditors and be rigorous in its selection of auditors on professional merit. • The board should satisfy itself there is no relationship between the auditor and the entity, or any related person that could compromise the auditor’s independence. The board should require confirmation of this from the auditor. • The board should facilitate regular and full dialogue among its audit committee, the external auditors and management. • No issuer’s audit should be led by the same audit partner for more than seven consecutive years. For listed issuers, NZX rules require most listed entities’ audit partners to be rotated from the engagement after a maximum of five years. • Boards of issuers and entities that are obliged to prepare and file financial reports under the FMC Act should report annually to shareholders and stakeholders on the fees paid to auditors, and should differentiate between audit fees and fees for individually identified non-audit work (for example, separating each category of non-audit work undertaken by the auditors, and disclosing the fees for this). • Boards of issuers should explain in the annual report what nonaudit work was undertaken and why this did not compromise auditor objectivity and independence. They should also explain the following: — how they satisfy themselves on auditor quality and effectiveness

— the boards’ approach to tenure and reappointment of auditors — any identified threats to auditor independence — how the threat has been mitigated. In assisting the board to discharge its responsibilities (including the principles and guidelines listed above), the Audit Committee might adopt terms of reference such as those outlined in Figure 7.5 below. Figure 7.5: Audit Committee Terms of Reference Constitution and Authority The Audit Committee shall be a duly authorised committee of the board.

Membership The Audit Committee shall establish an appropriate composition for its membership, having regard to expertise in financial reporting and auditing. At least half the members of the Audit Committee must have a degree in accounting or auditing. The Audit Committee must appoint a chair. The chair must be an independent non-executive director. The chief executive officer will not be a member of the Audit Committee. The Audit Committee will have at least three members. All members of the Audit Committee will be independent nonexecutive directors where possible. A quorum shall require the attendance of two independent nonexecutive members of the Audit Committee.

Meetings The Audit Committee will meet at least three times per year. The Audit Committee will have the authority to convene any additional meetings at the request of a committee member. Minutes of all Audit Committee meetings will be kept.

Roles and Responsibilities The Audit Committee shall nominate the external auditor for appointment and reappointment. The Audit Committee shall define a policy for the provision of audit and non-audit services by the auditor. The Audit Committee shall monitor and review the external auditor’s independence and shall request confirmation of this from the auditor. The Audit Committee shall approve all service contracts for the provision of audit and non-audit services by the auditor as well as the agreed remuneration. The Audit Committee shall meet with the auditors who provided audit services, at the conclusion of their engagements, to discuss their findings and may conduct these meetings in the absence of management. The Audit Committee shall ask to be informed of all: •

deficiencies identified in the management letter

•

irregularities identified in financial reporting

•

identified breaches of the organisation’s policies (eg health and safety or human resources), and

•

identified breaches of legislation or standards (eg health and safety or human resources).

The Audit Committee shall review the interim and annual financial statements and any other formal announcements relating to financial performance before submission to the board, focusing particularly on: •

changes in accounting policies

•

areas requiring significant management estimates or judgment

•

significant audit adjustments

•

the going concern assumption

•

the audit opinion

•

compliance with financial reporting standards, and

•

compliance with Main Board/Debt Market Listing Rules and legal requirements.

The board shall disclose in the annual report: •

the composition and qualifications of the Audit Committee, and

•

the role of the Audit Committee.

The Audit Committee shall have the power to request the attendance of the chief financial officer, chief executive officer or any other member of management it may require to respond to questions. The Audit Committee shall oversee the internal audit function, if any. In this capacity, the Committee shall: •

evaluate and recommend an internal audit plan in consultation with the internal auditor

•

evaluate the budget for the internal audit plan and what resources will be required, and

•

consider whether the external auditors have any recommendations to include in the internal audit plan.

Other The Audit Committee shall review these Terms of Reference at least annually.

Footnotes 5.

See Financial Markets Authority “Corporate Governance in New Zealand: Principles and Guidelines — A Handbook for Directors, Executors and Advisers” (December 2014) at Principle Seven (7).

Chapter 8: PREPARATION AND CONDUCT OF COMPANY ANNUAL MEETINGS Editorial information

Bede Carran

¶801 Introduction The Companies Act 1993 requires the board of a company to call an annual meeting (s 120). The annual meeting is an important statutory event in a company’s calendar. It is where a company’s annual report, which includes the financial statements, is presented to its shareholders (also referred to as members) and other formal business (such as the appointment of the auditor) is often conducted. It is also an opportunity for the shareholders to question and comment on the performance of management and have their own resolutions put to the vote. As such, the annual meeting and the business conducted at it, is usually the primary occasion where the directors account to the company and its shareholders. It is also frequently the forum where the directors discuss the prospects and plans of the company with shareholders. The board of directors is responsible for the preparation and circulation of the company’s annual report, which includes its financial

statements. If it is a statutory requirement or the shareholders request an assurance engagement, the financial statements will have been audited. The directors are responsible for ensuring the audit is undertaken if required. Much of what is required of companies for their annual meetings represents good practice for other organisations, for example, incorporated societies and charitable trusts, even where they do not have the same statutory obligations imposed on them.

¶802 Documents that govern the preparation and business of the annual meeting The business and conduct of a company’s annual meeting is regulated by two documents: (i) the Companies Act 1993 (ii) the constitution on the company (if the company has one). Where the two documents have conflicts over procedures or requirements, it is the Companies Act that prevails, unless it specifically states that the constitution of the company can prevail. Briefly, a company is not required by the Companies Act to have a constitution. A constitution governs the relationship between the company and its shareholders. It is preferable that a company has a constitution, as most professional advisors would strongly recommend in favour of its adoption. If a company is contemplating adopting a constitution, it is advisable to consult a specialist corporate lawyer on what matters it should cover. While much of the constitution may be templated, it is important that the constitution is drafted to address particular needs of the company and its shareholders.

¶803 Flexibility to modify reporting requirements to meet needs of company and shareholder A feature of the Companies Act 1993 is that, with shareholder

approval, it provides flexibility for the directors to adopt alternative procedures, or to approve allowed waivers of statutory reporting obligations. The level of shareholder approval that is required will vary depending on the nature of the reporting or the statutory requirement that is being varied or waived (the specific majority requirements are set out below in regard to various alternative procedures or waivers). The policy reason for permitting this flexibility is to reduce the compliance costs associated with statutory reporting. This is justifiable where all shareholders are represented on the board, as is frequently the case in closely held companies, or, for example, where the shareholders are comfortable with the level of reporting they receive from the directors. This enables a company to dispense with the time and resource required to undertake an exercise that shareholders agree is unnecessary. However, it is not intended that reporting concessions or waivers are used to deprive the shareholders of their right to have the director’s report on their stewardship of the company’s assets and its performance during the year. For this reason, it is important that, in taking advantage of the reduced reporting requirements, or exercising shareholder waivers, there is a careful adherence to the statutory process permitting these concessions. The material in this chapter is focussed on the requirements of annual meetings for closely held companies. While many of the requirements may be dispensed with, particularly in the case of the “mum and dad” or closely-held companies, the directors may wish to consider carefully the benefits of conducting the business of an annual meeting. This need not be an expensive or time-consuming event. It presents an opportunity for the directors to reflect on the performance and direction of the company instead of merely signing the statutory paperwork drawn up by professional advisors in the shortest time possible, with little or no reflection.

¶804 Resolution in lieu of annual meeting

As noted above, the Companies Act 1993 grants to companies the option of alternative means of discharging their statutory obligations to shareholders. Section 122 of the Companies Act permits resolutions to be passed by shareholders in lieu of holding the annual meeting. However, it is subject to a number of criteria being satisfied to ensure the shareholders’ interests are protected. Specifically: • the resolutions must be in writing • the resolutions must be signed by not less than 75% of the shareholders entitled to vote on the resolution and who must hold not less than 75% of the votes entitled to be cast on that resolution — or if the constitution of the company specifies a higher percentage for a special resolution, for example 80% of shareholders, it is that higher percentage • a copy the resolution must be sent, within five working days of being passed, to every shareholder who did not sign it, and • if they are special resolutions relating to the adoption or alteration of the company’s constitution or entry into a major transaction, they must include a statement setting out the rights of the shareholder to have the company compulsorily acquire their shares. When these criteria have been satisfied, the resolution has the same effect as if it had been passed at a meeting of the shareholders. The resolutions can consist of one or more documents in similar form, such as letters, telegrams, cables, facsimiles, telex messages, electronic mail, or other similar means of communication. If the company fails to give the notice to the shareholders that did not sign the resolutions, both the company and every director are liable on conviction to a fine not exceeding $5,000. The resolutions signed in lieu of a meeting apply only to the accounting period to which they relate. An annual meeting must be held the following year, or new resolutions must be passed.

Example Company A has five shareholders. Company A’s constitution provides that special resolutions must be passed by a majority of 75% of the shareholders, that is, it is the same percentage as set out in the Companies Act. The shares are held in the following proportions: • Shareholder A 30% • Shareholder B 30% • Shareholder C 20% • Shareholder D 10% • Shareholder E 10% It is proposed that a resolution be passed in lieu of holding an annual meeting. Shareholders B, C, D and E resolve to pass the resolutions. Shareholder A votes against the motion. The resolution cannot be passed. While at least 75% (four of the five shareholders equals 80%) of the shareholders have resolved to pass the resolution, Shareholder A holds 30% of the shares. As a result, it does not satisfy the requirement that at least 75% of the votes entitled to be cast on the resolution would be satisfied. Company A must hold an annual meeting.

The constitution of the company must be checked to determine how the votes of shareholders are counted. For example, in some companies, it may be one shareholder, one vote. In such cases, it is necessary that care is exercised to ensure the correct number of shareholders sign in favour of the resolution. A practicable issue can arise when conducting business by way of resolution if shareholders do not sign and circulate the resolution. It can leave uncertain whether particular shareholders are opposed to the motion or are simply not attending on the matter (for whatever reason) or have not received the resolution due to an out-of-date address. Resolving such issues may prove to be problematic and is

likely to be administratively burdensome. It is good practice to have a firm indication whether the resolution will have the requisite shareholder support prior to circulating the motion, and make it administratively convenient for the shareholders to execute and return the required documents.

¶805 Exceptions to the minimum majority of 75% rule In 2013 there were some significant changes to the Companies Act 1993. These changes took effect on 1 April 2014. One of the important changes was to introduce a distinction between companies with 10 or more shareholders and companies with less than 10 shareholders. Where a company has 10 or more shareholders, it is presumed that it will comply with the statutory requirement to prepare an annual report, prepare financial statements that comply with generally accepted accounting practice (GAAP) and have those financial statements audited. These presumptions can be reversed if — not less than 95% of shareholders entitled to vote and voting — resolve that the company will not comply with one or more of the following: • the requirement to prepare financial statements • the requirement to be audited • the requirement to prepare an annual report. This presumption is reversed for companies with less than 10 shareholders. In that instance, it is presumed that the company will not: • prepare financial statements that comply with generally accepted accounting practice (GAAP) (but will prepare financial statements that comply with the requirements of the Tax Administration Act 1994) • be audited

• prepare an annual report. If a shareholder or shareholders of the company who together hold not less than 5% of the voting shares give notice to the company that they are not in agreement with one or more of the above provisions, the company must ensure that it complies with the matter on which notice has been given.

Example Company B has five shareholders, each holding 20% of the issued shares. One shareholder has given notice that they wish to have the company prepare financial statements that comply with generally accepted accounting practice (GAAP). The company must prepare financial statements complying with GAAP. There is no requirement for the company to prepare an annual report or have its financial statements audited unless the requisite notice is given by a shareholder.

¶806 Business conducted at an annual meeting Strictly speaking, there is little statutory business that must be conducted at an annual meeting, unless the constitution specifically provides for specific matters to be addressed, for example, that an annual report must be presented. Where a company has a constitution, it must be checked to identify what, if any, specific business must be conducted at the annual meeting. As mentioned above, an annual meeting is usually the forum where the directors present their annual report, the financial statements, deal with matters such as the appointment of the auditor and (re)appointment of directors, and discuss the prospects and challenges for the company.

Other matters, such as the declaration of dividends, may be discussed at the meeting, but it is often as part of the annual report and the financial statements where they are declared. This is in part due to the statutory obligations imposed on directors to attest that the company is solvent both prior to and after the declaration and payment of the dividend.

¶807 Shareholders’ rights at an annual meeting It is the purpose of an annual meeting for the shareholders to receive an account of the company’s performance, it prospects, and any other material information impacting the company, and to question, discuss and comment on the directors’ governance and stewardship. For this reason, the chair (usually the chair of the board) of the annual meeting is required to ensure that shareholders are given a reasonable opportunity to question, discuss and comment on the performance of management. If shareholders wish to put their own notice or proposal for discussion, they must observe the statutory time frames to ensure the matter is put on the agenda of the meeting at the company’s expense rather than their own. For example, Schedule 1 requires that the board must distribute, at the company’s expense, the shareholder’s notice and the text of any resolution accompanying the notice, if it is received more than 20 working days before the last day on which the notice of the annual meeting is required to be given by the board. If the shareholder’s notice and the text of any resolution accompanying the notice is received between 5 and 20 working days before the last day on which the notice of the annual meeting is required to be given by the board, it is distributed at the shareholder’s expense. Where a shareholder requests a resolution be put to the meeting as part of the annual meeting’s business, it is necessary for the directors to look closely at the constitution or the requirements of Schedule 1 to determine its obligations to act in good faith to meet the shareholder’s request.

¶808 Date of annual meeting and relevant notice period A company’s annual meeting must be held within prescribed time frames, determined with reference to both the company’s balance date and its previous annual meeting. Specifically: (i) the annual meeting must be held not later than 6 months after the company’s balance date for the period to which the annual meeting relates, and (ii) not later than 15 months after the previous annual meeting. Where it is the company’s first year of its registration, it is must hold its first annual meeting within 18 months of its registration. Appropriate notice of the annual meeting must also be given. If a company has no constitution, the period of notice is dictated by the Companies Act 1993, in particular sch 1. Notice of the annual meeting (or any other meeting) must be sent to every shareholder (and also to the directors and auditor if the company has one) at least 10 working days prior to the meeting. It is important to note that while the notice period for the annual meeting cannot be less than 10 working days, it cannot be more than 30 working days.

¶809 What the notice must include? The notice must state: (a) the nature of the business to be transacted at the meeting in sufficient detail to enable a shareholder to form a reasoned judgment in relation to it (b) the text of any special resolution to be submitted to the meeting, including the text for resolutions dealing with the right to opt in or opt out of the statutory reporting and audit requirements (c) the right of the shareholder to have the company acquire their shares in certain and limited circumstances (principally around

matters that are major transactions for the company or alter significantly a shareholder’s rights).

¶810 How proper notice is given? There are particular rules regarding what constitutes proper notice to shareholders. If the shareholder is an individual, notice can be delivered, posted or transmitted by facsimile or email, and it is not uncommon for notices to be transmitted electronically to an address provided to the company by the shareholder (see s 391 of the Companies Act 1993). Where the shareholder is a company, the Companies Act permits the document or notice to be delivered in a variety of ways and to a range of addresses, intended to expedite the delivery of notice and documents. The notice can be: • delivered to a named director of the shareholder company • delivered to the company itself at its address, either at its registered office or address for service, or if the constitution permits, the head office or principal place of business of the shareholder company • posted, including to a document exchange • transmitted by facsimile • emailed to an address used by the company, or an email used by a director of the company. See s 388 of the Companies Act. Slightly different rules apply if the shareholder company is an overseas company, but notice can be effected by delivery, posting or transmitting to an address in New Zealand. Where the shareholder is a body corporate other than a company or an overseas company, for example, where it is an incorporated

society, a notice, statement, report, accounts, or other document can be: • delivered to a person who is a principal officer of the body corporate, or • delivered to an employee of the body corporate at the principal office or principal place of business of the body corporate, or • delivered in such manner as the court directs, or • delivered in accordance with an agreement made with the body corporate, or • posted to the address of the principal office of the body corporate or delivered to a box at a document exchange which the body corporate is using at the time, or • sent by facsimile machine to a telephone number used for the transmission of documents by facsimile at the principal office or principal place of business of the body corporate. It is important to note that where the shareholder is a trustee, the provisions that apply are based on whether the trustee is a natural person or a corporate person. A trust is not a separate legal entity and the trust and the trustees are one and the same. Consequentially, if the trustee (or trustees) is/are natural persons, the notice provisions for natural persons apply; if the trustee shareholder is a company, the notice provisions for companies apply. The delivery requirements of notice and documents indicate the need for a company to maintain accurate and current shareholder registers, including contact details. There are businesses that perform shareholder registry services. However, it is usual that these are engaged by companies which have extensive and/or frequent shareholding changes, for example, listed companies. Small companies usually maintain their own shareholder registers.

¶811 The time frame to constitute notice The Companies Act 1993 requires that a specific number of days is required to constitute proper notice to a shareholder. The Companies Act also specifies that notice is not deemed to have been given until a specified number of days have elapsed. The specific number is determined by how notice is given or transmitted. Where documents are posted, they are deemed to be delivered five working days after posting. In the case of transmission by facsimile or email, the document or notice is deemed to be delivered on the working day after the transmission occurred. The importance of this is that the working days required for the posting or transmission of the notice must be added into the corporate calendar when determining the date of meetings and dates when accompanying documents must be sent to the shareholders. For example, if the notice of the annual meeting is being posted, at least 15 working days must be allowed which is calculated upon notice of 10 working days for the meeting itself and five working days for the notice period to commence. The annual report — at least 20 working days before the annual meeting Where a company is holding an annual meeting, the board must ensure that not less than 20 working days prior, every shareholder is sent either: (a) a copy of the annual report, or (b) a notice advising the shareholder they can obtain, free of charge, a copy of the annual report, so long as the shareholder makes the request within 15 working days of receiving the notice, or (c) a statement to the effect that the shareholder may obtain a copy of the annual report by electronic means; and how to obtain it, for example, at a website address.

Some companies produce a concise annual report. In that case, the board must similarly advise the shareholders that they have a right to receive, free of charge, a copy of the concise annual report, so long as the shareholder makes the request within 15 working days of receiving the notice, or that they can obtain a copy of the concise annual report by electronic means and how that can be accessed, again for example from a specified website address. These provisions are contained in s 209 of the Companies Act. It makes sense, therefore, to send both the notice of the annual meeting and the annual report or information on how to obtain a copy at the same time, notwithstanding they have different notice periods.

Example BWV Limited is a musical supplies company, with a balance date of 31 March. It has prepared an annual report. The board advises that the date of the annual meeting will be Tuesday, 15 September 2015. To meet the statutory requirement that the shareholders receive the annual report, or notice of where the annual report can be obtained, BWV must ensure that it is advises all shareholder no later than Tuesday, 18 August 2015. Some of the shareholders have indicated that they would like to receive the documents by post and some corporate shareholders by email to their corporate head office. The company must add five working days to the not less than 20 working days required for the shareholders to receive the documents prior to the annual meeting. This requires the documents to be posted no later than 11 August 2015. Administratively, it is preferable to disseminate all notices and documents at the same time, and it needs to be commenced having regard to the earliest date that the notice and documents must be circulated. The documents sent for the annual meeting must have left the office of the company over a full calendar month prior to the annual meeting. These timetabling requirements need to be factored in to accommodate the directors preparing and approving the annual report and financial statements, including allowance for the audit if one is required. Generally, 20 working days translates to one calendar month. However, care must be exercised around Christmas, Easter and other public holidays, including any applicable anniversary day to ensure the calculation is correct. The term “working day” is defined in the Companies Act. Broadly, it is Monday to Friday excluding

public holidays, and a public holiday includes the anniversary day of the district. While the notice of the annual meeting could go out later, it makes administrative and financial sense for BWV to send the notice of the annual meeting at the same time as the annual report is sent out.

What happens if there is an irregularity in the notice or at the meeting? There may be occasions where there is an irregularity in regard to an annual meeting formality. This may relate to the notice being late or the annual report not being complete in all its statutory requirements. Schedule 1 of the Companies Act permits these irregularities to be waived if all shareholders entitled to attend and vote at the meeting attend the meeting without protest as to the irregularity, or if all such shareholders agree to the waiver. Where the company has its own constitution, the directors must refer to it to see whether it provides specific procedures to be followed where an irregularity is identified. Period to opt in or opt out of Companies Act requirements As noted above, companies with 10 or more shareholders may opt out of the requirement to prepare an annual report, prepare financial statements that comply with generally accepted accounting practice (GAAP) and the requirement to be audited. Companies with less than 10 shareholders may opt into one or more of the requirements. The right to opt out or opt in must be exercised within six months of the beginning of the accounting period or the date of the annual meeting, whichever is earlier (Companies Act 1993, s 207H).

Example KV Limited has 15 shareholders. It has a balance date of 31 March. It is holding

its annual meeting on 22 September 2015. The opt out period ends on the earlier of the date of the annual meeting or 30 September, being six months after the accounting period begins. If KV Limited’s shareholders wish to have it opt out of the obligation: • to prepare financial statements complying with GAAP, • to be audited, or • to prepare an annual report, this resolution must be passed by 22 September 2015 for the accounting period 1 April 2015 to 31 March 2016. The resolution is effective only for that accounting period.

¶812 Conducting the annual meeting Like all meetings, preparation is the key to a constructive and smoothly run meeting. This requires that the appropriate notice and documents have been distributed within the appropriate time frames. Matters that are required, or should be considered, are set out below. The meeting must have a chair Where the directors have elected a chair, and that person is present at the meeting, she/he will be the chair for the meeting. If the chair is not present, the shareholders may choose a person present to chair the meeting. Some constitutions grant the right of appointment of the chair for the meeting to the directors present at that meeting. If no directors are present, a highly unusual occurrence, the shareholders present would choose a person to chair the meeting. The meeting must have a quorum A quorum is the minimum number of shareholders who must be present for the business of the meeting to be transacted and passed. If a quorum is not present, within a specified time, for example 30 minutes, the meeting must be adjourned. Schedule 1 of the Companies Act, or the constitution of the company, must be checked

to determine the time that may elapse before the meeting is adjourned, and the dates and processes for it to be reconvened. It is usual that a quorum is present if shareholders or their proxies who are present, or postal votes between them are able to exercise a majority of the votes to be cast on the business to be transacted. Schedule 1, and increasingly many companies’ constitutions, specifically allows attendance by audio, televisual or electronic means. The constitution of the company can vary the shareholders required to constitute a quorum; for instance, it may allow two shareholders present to constitute a quorum. The use of the proxy votes It is common and usual practice to allow proxy votes. Proxies cast the vote on behalf of the shareholders who are not present at the meeting. There are procedural matters that relate to the exercise of the vote by the proxy. The constitution of the company must be checked to ensure that the use of proxy votes is permitted, and if so, that the proxy’s right to attend and vote is in order. Where the use of proxy votes is permitted, matters that may be covered include: • the form the shareholder executes directing the proxy, for example, whether specific direction on voting in favour or against resolutions has been given to the proxy, or • a general authority given by the shareholder to the proxy to vote in favour or against resolutions at the proxy’s discretion, for example, a shareholder may grant a proxy to the chair of the meeting, or any other person who meets the requirements set out in the constitution, to cast the vote as they see appropriate • whether a shareholder authority to a proxy must be communicated to the company by a specified time prior to the commencement of the meeting, for example, 48 hours, or alternatively, the proxy may be entitled to present the authority at the meeting itself. Ordinary resolutions and special resolutions

One of the important matters to be aware of at meetings is the majority of votes required support a resolution. There are two types of resolution. These are: (i) an ordinary resolution, which means a resolution that is approved by a simple majority of the votes of those shareholders entitled to vote and voting on the question, and (ii) a “special resolution”, which means a resolution approved by a majority of 75%, or if a higher majority is required by the company’s constitution, that higher majority of the votes, of those shareholders entitled to vote and voting on the question; for example, a company’s constitution may require a majority of 80% (or more) to pass a resolution, which makes it a special resolution. The Companies Act specifies those matters that require a special resolution of the shareholders (see s 106). It is reserved for matters that are particularly important to a company and its shareholders. As noted above, separate provisions apply regarding the preparation of financial statements, their audit and the preparation of an annual report. The term “entitled to vote and voting” refers to those shareholders who are present at the meeting, or voting via proxy. It does not include shareholders who do not attend and who do not give a direction for voting by proxy. It is also important to confirm whether the question on which voting will take place requires an ordinary resolution or a special resolution. Such matters require a careful examination of the exact nature of the question, the Companies Act and if the company has one, its constitution, and may well require professional advice. The directors will potentially place themselves in an invidious position if a question to be voted on is incorrectly framed as an ordinary resolution when it should be a special resolution or vice versa.

Example Absent Friends Limited has 10 shareholders, each holding 10 shares. Its constitution states that a quorum for an annual meeting is a majority of shareholders either attending or voting by proxy. For special resolutions, its constitution follows the Companies Act and requires a majority of 75% of shareholders entitled to vote and voting on the question. At its last annual meeting, five shareholders attended in person and two shareholders gave a proxy to one of the attending shareholders to vote on their behalf, that is, seven shareholders attending in total, either in person or by proxy. As three shareholders did not attend and did not give a direction for voting by proxy, the business of the annual meeting is conducted having regard to those seven shareholders either attending and/or voting by proxy. A quorum exists as more than 50% of Absent Friends Limited’s shareholders are attending or voting by proxy. At the annual meeting of Absent Friends Limited, there is one ordinary resolution and one special resolution. The ordinary resolution is in regard to a motion that Absent Friends Limited’s current directors should be reappointed for a further 12 months. As there are seven shareholders entitled to vote and voting, and the resolution requires only a simple majority, at least four of the shareholders must vote in support of the resolution for it be passed. The special resolution is that the current constitution of Absent Friends Limited should be altered to change the provisions regarding the method for valuation of its shares. As a special resolution, it requires a 75% majority of those shareholders entitled to vote and voting on the question. It means that six of the shareholders must vote in support of the resolution (7 × 75% = 5.25). If only five of the shareholders vote in favour of the proposed change to the constitution, the majority is 71.4% (five shareholders voting divided by seven shareholders, which is the total number of shareholders entitled to vote and voting).

How votes are counted? The voting at the meeting usually takes place by voice (those in favour, those against, motion is carried or lost as appropriate) or by a show of hands. The vote on resolutions at the meeting can be decided by poll if the chair directs, or if shareholders demand a formal vote count.

Where the shareholder is a company, it votes by an authorised representative. Who the representative is should be communicated to the company so that it has confirmation of who is the authorised representative. Where shares are held in joint names, it is the vote of the person who is first named in the share register that casts the vote for the joint shareholders. The first named shareholder may authorise another joint holder to vote at the meeting. Chair’s casting vote Whether the chair of the meeting has a casting vote is determined by the company’s constitution. It will be up to the company concerned if the chair should have one. If there is no constitution, the chair will not have a casting vote. If there is no casting vote and the motion put is not approved by a majority, that is, it is 50:50, it is lost, and the resolution is therefore not adopted. Making the annual meeting run smoothly There are a number of steps the directors can take to ensure the annual meeting, or any meeting, runs smoothly. First is ensuring there is a meeting (or minute) secretary to record the minutes of the annual meeting. It not unusual to have one of the directors or a senior officer of the company perform this function. Knowledge of meeting processes, the constitution, the Act and good Minute practices is highly recommended for whoever undertakes this responsibility. Ensuring there is an accurate record of the meeting, and the resolutions is critical, and it is preferable that one person is assigned to ensure this occurs, and that directors or executives are not distracted from the business of the meeting itself. Competent minute secretaries will have a good understanding of meeting procedure, the constitution of the company and the business of the meeting. This enables them to assist the directors with matters of procedure. Second, being well prepared to record the shareholders attending,

including the number of votes they control, whether in person, by proxy, through postal voting or by electronic means if the constitution of the company permits this. This is important for ensuring there is a quorum, and that the business can be transacted, and keeping track of the votes when cast on the business. Third, if there is to be contentious business discussed at the meeting, it is advisable to invite the company’s legal advisor, and any relevant other professional advisor such as a chartered accountant, to be available to speak on the matter. If the company has appointed an auditor, they have a right to attend and speak to the annual meeting if they believe it is appropriate to do. The directors may wish to have auditors present in any event, and it is not uncommon to have the auditor present at the annual meeting even if there are no material items or matters arising from the financial statements. Some company’s constitution may require that the auditor is invited to attend the annual meeting. Accordingly, it is important that the constitution is checked to determine whether any persons, such as the auditor, are to be invited to the annual meeting. Having corporate documents available for perusal It is advisable for the board to consider what relevant corporate documents it should have readily available at the annual meeting. This may include, for example, the minute book, the interests register, the register of shareholders, and the shareholders’ agreement. It is convenient if a party to the meeting wishes to seek clarification or confirmation on a matter defined in one of these documents.

Figure 8.1: Checklist to consider what documents are needed before annual meeting Does the company have a constitution? •

yes, then it and Schedule 1 must be checked for procedures

•

no, then reference to Schedule 1 for procedures

Has the company set a date for the annual meeting?

Is it less than six months since the balance date?

Is it less than 15 months since the last annual meeting, or the date of resolution in lieu of the meeting?

Have any shareholders written advising of a shareholder resolution, •

is it more than 20 working days before the notice of the annual meeting?

•

is it between 5 and 20 working days before the notice of the annual meeting?

•

is it less than 5 working days before the notice of the annual meeting?

Is shareholder register up to date, including contact details?

Has the agenda for the annual meeting being reviewed by the board?

Are the directors comfortable resolutions are framed as ordinary resolutions or special resolutions as appropriate?

What is majority required to pass a special resolution, for example, 75% or has the company’s constitution altered this requirement (it cannot be less than 75% but a company can set a higher majority for passing special resolutions)?

Has notice of the annual meeting being given to: •

all shareholders?

•

the directors?

•

the auditor, if the company has one?

Posting of annual report prior to annual meeting Notice of 25 working days required •

20 for the circulation of the annual report

•

5 for posting the annual report

Emailing or delivery of annual report prior to annual meeting Notice of 21 working days required •

20 for the circulation of the annual report

•

1 for posting the annual report

Who is collecting and recording the proxy and postal votes?

Is attendance permitted by audio, visual or electronic

means? — if yes, •

who is managing the digital connectivity of remote members

Has consideration been given to whether professional advisors should attend? At the meeting

How many members constitute a quorum?

Who is counting whether the members present constitute a quorum?

Is there a person designated to take the minutes of the meeting?

Are corporate documents on hand for shareholder perusal or to answer questions?

Chapter 9: EMPLOYMENT OF THE CHIEF EXECUTIVE OFFICER Editorial information

Susan Robson and Bede Carran

¶901 Introduction A chief executive officer (CEO) implements the employer’s (company, trust, co-operative, incorporated society, partnership or family business) vision, values and strategic direction for the business. Choice of CEO is, therefore, critical to the success of the business, as is the relationship between employer and CEO, which is often the single most important relationship in the organisation that determines performance and culture. In particular, the relationship between the chair of the board and the CEO is critical in fostering a strong and cohesive culture that is motivated to deliver on its vision. The purpose of this chapter is to describe: • recruiting processes that help employers to engage the right person for the position • the employer’s rights and obligations within the employment relationship

• problem identification and resolution strategies • managing the end of the employment relationship.

¶902 Recruitment Identifying employer’s requirements This process requires the employer to have a clear understanding of its expectations for the position. This will be dependent on the current state of the business and the environment in which it is operating, whether it is to grow, diversify, merge or acquire other businesses, or whether it needs to recover or maintain its status quo. For example, if the company is in a growth phase, it needs to determine whether the growth is principally organic growth (ie growth of customers and/or products driven from internal changes) or is it growth by acquisition (ie where other entities or businesses are acquired to help with the growth of the company). Alternatively, the company may have completed a period of growth and is looking to consolidate its operations, or restructure to operate in a much more efficient manner. All of these factors affect the particular skills that are sought for the CEO’s role. However, there is usually a reasonable expectation that a CEO will be capable of building and maintaining strong relationships and networks to promote and represent the business across a range of different forums. The board of the company should reach a consensus on business strategy, the characteristics of the ideal CEO and their order of priority should be reached before a position description is formulated. This could include consideration of the position’s purpose, the tasks unique to it, the challenges it will face, results that must be achieved, the skills, knowledge and behavioural attributes required for each of its duties. Position Description Position descriptions, which describe the employer’s expectations of the CEO’s role, often form part of an employment agreement (as an

attachment) and provide a basis for appraising and measuring job performance. It is also usual for the position description to be available as part of the recruitment process so that applicants for the CEO’s position have a clear understanding of the role. They usually include the following: • role purpose • key expected outcomes • significant working relationships (the main internal and external contacts the CEO will have in the proper performance of the role) • key accountabilities (eg people management, communications, strategy advice, business policies, standards and procedures, reporting) • decision-making authority • personal attributes and qualifications (eg educational qualifications, specific skills, competencies or experience required for the role). They should be regularly reviewed, particularly if organisational circumstances or expectations of the role change. Remuneration For established positions, many CEOs will have clear expectations as to what constitutes an appropriate remuneration package. For a newly created position, fixing the appropriate remuneration can be assisted by reference to industry benchmarking, national salary/remuneration surveys and (depending on the scope of the business) by some international surveys. Surveys (at a small charge) can be obtained from Chambers of Commerce, professional industry bodies, trade associations and most international recruitment firms. Human resources and remuneration specialists can provide advice on remuneration and total remuneration packages (TRP). For larger employers (with more than 20 employees), job evaluation

services can be purchased to help set remuneration. The job evaluation process assesses the position, its interrelationships, accountabilities, capability requirements and development needs. Job evaluation is best undertaken as an exercise involving the whole organisation, not just a single position, so that relativities are clear. Remuneration packaging is common for CEO roles, either in a TRP or via base salary plus benefits. A TRP may include at-risk components or bonus payments (ie performance-based), car, parking, superannuation, additional leave entitlements, professional body membership fees. It is attractive to potential appointees because it enables them to decide how they want their remuneration to be structured. The employer should establish remuneration maxima (commonly known as total employment cost or TEC) as a means of comparing remuneration options, and seek professional accounting advice where choices are on offer: every choice has financial implications.

Example A Ltd offered its new CEO, X, a carpark. Its value was $5,000. X wanted a gym membership (valued at $5,000) instead. Sometime later, X began to use the car park, at first irregularly but then every working day. A Ltd knew this was happening but did nothing. Over time X’s use of the carpark became a benefit that X expected to retain. This meant A Ltd had to pay fringe benefit tax for X’s use of the carpark, meaning that X’s total remuneration increased, but not as a result of any active steps taken by A Ltd.

Interviewing Interviews of short-listed candidates should be the subject of careful preparation so that the same categories of information are elicited from each candidate. The position description should guide the interviewer/panel and can form the basis of an assessment system at

interview. Figure 9.1: Shortlisting Summary Form

A common form of questioning, known as behavioural interviewing, is a means of examining the past performance history of the candidate by focusing them on experiences, behaviours, knowledge, skills and abilities that are job-related. By encouraging the candidate to describe how they dealt with matters relevant to the position description, interviewers can avoid the trap of seeking information about the candidate’s personal characteristics: gender, marital/family status, age, religious, political or ethical beliefs, race, colour, ethnicity, sexual orientation, disability, employment status. It is illegal to make candidate selections on the basis of these personal characteristics, so solicitation of these details has the potential to cause an unsuccessful candidate to believe that this was the basis for their rejection. They have rights to complain to the Human Rights Commission if they believe that they were discriminated against in the candidate selection process. As part of the interviewing process, consideration should also be given to the use of assessments designed to test a candidate’s verbal and numerical reasoning. Similarly, psychometric testing can be used to determine professional and personal strengths and weaknesses and the candidate’s style when dealing with issues such as conflict or ambiguity. Broadly, ambiguity refers to the concept of competing proposals where the optimal choice may contain a number of risks or

shortcomings from the designed or expected outcome. Many recruitment firms are able to advise on these tests, when and how they should be used, which are appropriate for a particular CEO role and the interpretation of the results. Selection In the public sector, the person best suited to the job is required to be appointed to a vacancy. Apart from the requirement not to discriminate (on the basis of the personal characteristics listed above), employers in the private sector are free to appoint whomever they wish. When the preferred candidate/s have been identified, references should be sought from the referees suggested by the candidate. The usual number is two. Just as the same categories of information should be sought from each candidate, so should the same type of information be sought from referees. Where academic qualifications (eg a degree) and professional credentials (eg membership of professional bodies) are presented by the candidate in support of their application, the provenance of these should be independently verified. Care needs to be taken that a genuinely independent verification occurs. This is not normally a difficult exercise. The candidate is usually asked to provide an authority for verification of their academic and/or professional credentials. A direct approach is then made by the employing organisation to the institution or professional organisation to verify the credentials. This process is both transparent and independent. All information provided by job candidates about themselves is personal information. Prospective employers are required to have systems to deal with the personal information they have been given during the recruitment process, once the vacant position has been filled. At that point, the personal information about unsuccessful candidates is no longer able to be retained without the consent of the candidate. Candidates should be advised what the employer intends to do with that information. The choices are to return it to the candidate, destroy it, return that provided by the candidate and destroy that generated by the selection process. Employers are not

required to disclose personal information in notes of advice from referees obtained during the interview and selection process. Appointment The most senior officer holder of the employer (usually the Chair) should make a verbal offer of employment to the preferred candidate and include details of the remuneration on offer. If the offer is accepted, it should be followed by a written offer of appointment, which should include the proposed employment agreement, remuneration package, position description, employer policies, key performance indicators (KPIs) and any other information relevant to the offer of employment. Statements or representations about the position, including salary and other benefits, should be accurate and not misleading. It is illegal to make untrue or misleading statements in any offers of employment. The appointee should be advised of their right to seek independent advice about the proposed terms of employment, and given sufficient time to do so. The employee has the right to raise issues about the proposed terms (or negotiate alternatives), the employer is obliged to consider and respond to those issues, but there is no obligation on the employer to amend the proposed terms, unless it wishes to do so. Employee status The CEO is an employee of the employer and is, therefore, employed under a contract of service. The position is usually a full-time one, but can be part-time if there is insufficient in the role to justify a full-time appointment. If a position is to be part-time, it must be advertised as such. Although it is possible to engage employees on fixed terms, or for probationary periods, it would be difficult to do so for the CEO position. A fixed term may be appropriate until the permanent position is filled, and few, if any, prospective appointees would consent to a probationary term. From an employer’s perspective, it is also likely to give the impression that its recruitment process has significant flaws if, for such a key position as that of the CEO, a probationary period is considered necessary or desirable.

¶903 Employment Agreement Preliminary requirements Chief Executive Officers are almost invariably employed under individual (rather than collective) employment agreements (sometimes referred to as an IEA). The employer is, therefore, required to: • provide to the new appointee with a copy of the agreement containing the terms of the employment relationship intended to bind them • advise the new appointee of their right to seek independent advice about it • give the new appointee a reasonable opportunity to seek that advice, and • consider and respond to any issues they raise about the agreement. An employer’s failure to comply with these requirements exposes the employer to liability to pay a penalty, but does not affect the validity of the employment agreement. Mandatory provisions Employment agreements between the employer and the CEO must be in writing and must contain the agreed terms of the employment relationship, including those negotiated additional to, and/or in substitution of, the proposed terms (in the employment agreement initially given to the new appointee). Employment agreements must contain: • the names of the employer and employee • a description of the work to be performed by the employee • the location where the employee will work

• the times the employee will work • wages or salary payable • employee protection clauses upon transfers of business undertakings • a description of the services available for the resolution of employment relationship problems, and • nothing that is contrary to law or inconsistent with the Employment Relations Act 2000. Common additions Employment agreements normally specify: • leave entitlements (annual, public holiday, sick and bereavement, discretionary) • allowances and benefits to which an employee may be entitled • notice requirements for resignations or dismissals • provisions concerning termination of employment • provisions concerning confidentiality and intellectual property, and • the means by which the agreement can be varied. Potential additions Commitment to the business of the employer: This provision imposes an obligation on the CEO to devote all of their working time to the employer’s business and to discharge this responsibility diligently. The importance of the position of CEO to lead and inspire the organisation means that it is difficult to elucidate precisely all of the requirements of the role. Therefore, there is an expectation that the CEO will demonstrate at all times exemplary standards of performance and conduct. This requirement can be included in the employment

agreement. Conflict of interest: This provision prohibits the employee from using their position, the employer’s assets or confidential information for their own personal gain or for the improper benefit of any other party. This could include setting up as a competitor or using information obtained during employment for personal gain. Confidentiality: Obligations of confidentiality of information belonging to the employer are implied into employment agreements but may also be the subject of a written term of an employment agreement. These obligations can extend to public information if the employer processes it in a unique way, so that the obligation attaches to the way the information is utilised. Restraint of trade: CEOs with access to important information belonging to the employer (eg trade secrets, client lists, supplier and pricing lists) and likely to pose some competitive risk to an employer once they leave, may be subject to restraints of trade provisions in their employment agreements in addition to the usual provisions concerning confidentiality and intellectual property rights (the ownership of intellectual property created by an employee will normally vest in the employer, unless there is a specific agreement otherwise). Restraint of trade provisions are amongst the most common issues litigated between senior employees and employers. They are more likely to be approved by the courts or the Employment Relations Authority, and are, therefore, effective, if they specify: • the employer’s interest that requires protection (eg trade secrets, client lists, supplier and pricing lists, unique software) • a reasonable time period of application (usually three to six months), and • the location/s to which they apply — the larger the location, the less likely they are to be regarded as valid (a region is more likely to be acceptable than the whole of New Zealand).

Non Solicitation: These provisions restrict an employee’s ability to solicit clients of the employer for other purposes. Most commonly, they operate as a restricted form of restraint of trade. Representations: Where the employee has made specific representations (eg about specific skills) on which the employer relied to enter the employment relationship, a provision explaining what will happen (eg dismissal) should they prove to be false or misleading should be included in the employment agreement. Performance assessment: The employer has rights to carry out performance assessments of employees from time to time. The organisation’s human resources policies should include reference to them and describe the process by which they occur; but if there are specific requirements of the CEO that are required to be periodically assessed, this should be recorded, together with time periods in which they will occur, the process or method of assessment, and key assessment criteria. If additional remuneration entitlements are dependent on performance assessments, this should be specified. Relationship Review: This provision specifies: • the process by which the parties review the state of the employment relationship • the terms of settlement in the event that they accept it should end. Garden leave: This provision clarifies for the employee a power that employers have to decide whether or not an employee should work out a termination notice period. The employee is placed on leave with full pay during a notice period to minimise risk to the organisation, if the employee is going to work for a competitor. It helps to reduce (but not eliminate) the problem of access to clients and commercially sensitive information that might benefit a competitor. Variation of employment agreement If, after the employment agreement is signed, there are new terms proposed (by either party) they must be agreed by both parties before the employment agreement can be altered to include the new terms. It is usual to have both parties sign a fresh agreement incorporating the

new terms. Alternatively, the new terms can be added to an existing agreement, so long as both parties add their signatures to them.

¶904 Employer obligations Holidays and Leave There are statutory obligations to provide for annual and public holiday, sick, parental and bereavement paid leave. It is usual to offer CEOs more generous leave entitlements than the statutory minima (4 weeks’ annual holiday, 14 days’ sick leave, 1–3 days for each bereavement). Leave entitlements are a common basis of negotiation. Employers have rights to be consulted about the timing of annual leave periods and rights of veto. They must have a good reason to refuse a leave request (where leave is owed) that reflects the needs of the workplace.

Example A Ltd always has its Annual General Meeting (AGM) at the end of June in each year. It is an occasion for shareholders to meet Board members and senior staff. Junior staff generally attend too and A Ltd likes to ensure these are special and memorable occasions. The new CEO, X, sought leave from mid-June to mid-July to attend a wedding in Europe. The Board Chair explained the situation, said that X really did need to be present at the AGM, so X changed the holiday plans to begin after the AGM.

Protected rights Most protected rights for employees have limited application to CEOs because they aim to protect employees with limited power and negotiation rights. They cover working time — flexible hours, rest and meal breaks, breastfeeding, parental leave, rights to transfer to the

new owner of an existing business if classed as a vulnerable worker. However, there are some protected rights that a CEO may claim have been breached: • Privacy: The CEO has rights not to have their personal information disclosed to others by the employer without consent; and to access personal information held about them by the employer (except that provided by job referees). • Discrimination: Statutory anti-discrimination provisions cover direct discrimination (making an employment decision based on a person’s gender, marital/family status, age, religious, political or ethical beliefs, race, colour, ethnicity, sexual orientation, disability, employment status), indirect discrimination, sexual and racial harassment, victimisation. • Whistleblowing: An employer is obliged to provide a forum (a safe listener) for employees who wish to complain about the actions of other employees or officers of the employer that have public consequences (eg private use of public monies). The provision of a listener in these circumstances benefits both the whistle-blower and the subject because it has the potential to ensure the concerns articulated are satisfactorily investigated and resolved in private. See Protected Disclosures, chapter ¶10. Health and Safety The health and safety obligation of an employer to a CEO would generally concern the safety of the workplace. This covers physical and psychological hazards. It requires any physical hazards of the workplace be addressed to minimise potential harm to the CEO. Psychological hazards are more complex but commonly arise where there are high expectations of the CEO but limited opportunities to discuss and resolve issues as they arise, and/or failures by the employer to recognise signs of stress. See Health and Safety at Work, chapter ¶5.

¶905 Managing and maintaining the employment

relationship Good Faith The duty of good faith is the major over-arching obligation that each party to the employment relationship owes the other. It is a statutory obligation arising from the Employment Relations Act 2000, so it cannot be avoided. Based on the idea that the relationship between employer and employee is more than purely contractual and is affected by the way that each behaves towards the other, it requires both parties to be active and constructive in establishing and maintaining a productive employment relationship. The parties must be responsive and communicative towards each other and not do anything to mislead or deceive the other. Compliance with this obligation is likely to be easiest for employers with direct, open, formal and informal channels of communication, a no-surprises policy, and a negotiative, consultative style of managing challenges to the relationship.

Example A Ltd had a policy about investigating employee misconduct (the first step was to advise the employee of the allegation); but when someone whispered in the Board Chair’s ear that the CEO, X, had been dismissed from a previous employer over unresolved financial irregularities, the Chair saw red and demanded evidence from X’s former employer. It turned out that X shared the same name as a person who had been dismissed over an issue of financial irregularities; but by the time the Chair realised this. X’s blemished employment history had been broadcast about the town. Had the Chair raised the issue at the outset, directly with X, the mistake would have become apparent and much upset, damage and grievance could have been avoided.

Misleading and deceptive

Whether or not someone intends to mislead or deceive another is less important than the effect of the deception. Similarly, someone who believes they have been misled or deceived must be able to show that others would also be misled or deceived in the same circumstances. The effect of a deception is more important than the intention of the deceiver.

Example When A Ltd sought a new CEO, it decided not to reveal to applicants the reason for the departure of the previous CEO who suffered a breakdown as a result of work pressures, nor the high turnover of senior staff who consistently sought the appointment of more staff. A Ltd did not wish to incur that cost and believed that a stronger CEO would cope with the workload. When X was interviewed for the position, she asked a number of questions about workload and delegations and was assured that the very small senior management team had never had a problem with the workload. X was appointed but she was unable to cope with the workload. She later won a significant damages award. A Ltd did not need to discuss why its previous CEO departed; but it should have spelt out the challenges of the job — high senior staff turnover and the demands of the workload — so that the incoming CEO was sufficiently prepared for them.

Provision of information and consultation The good faith obligation includes a positive duty to keep the CEO up to date with employer views of the CEO’s performance. It is based on the idea that open exchanges of relevant information and the opportunity to add to, or contradict, it before decisions are made promotes industrial harmony. This is both a general and a specific obligation and its corollary is consultation — the obligation to provide employees affected by a workplace restructure with the opportunity to comment on it. However, restructuring is less likely to affect the CEO than others in the workplace. Since employers rely on their CEOs to

manage workplace change/restructuring the employer should expect an incoming CEO to know about these obligations.

¶906 Records and information The Privacy Act 1993 imposes obligations on employers who collect and hold personal information about identifiable individuals (eg employees, customers, suppliers). Employers hold personal information about the CEOs of their businesses/organisations (eg contact details, KiwiSaver/superannuation scheme membership details, remuneration and bank a/c details, information from referees). Chief Executive Officers are usually responsible for ensuring obligations about the personal information of others (collected and held by the employer) are met, so it is useful to have policy about the management of personal information. Checklist A policy about personal information collected and held by an organisation should: • ensure it is necessary for the conduct of the employer’s business • collect it directly and lawfully from the employee, rather than others (unless impracticable) • ensure the employee understands why it was collected and held • keep the information secure from loss, misuse or unauthorised access • provide access to the information on request by the employee • correct any information on request by the employee • ensure it is kept accurate and up to date • keep it only for so long as is necessary for the conduct of the employer’s business

• use it only for the purposes for which it was obtained • ensure it is not disclosed to others without the employee’s consent.

¶907 Performance management Setting performance expectations for the CEO is an important step in establishing them throughout the organisation. Expectations should be set and documented on the basis of the employer’s strategic plan, along with how their achievement will be measured and reported. Expectations are commonly measured by key performance indicators (KPIs), reported back through monthly board reporting and annual performance reviews. Key performance indicators Key performance indicators are used to measure defined progress towards organisational goals. Both the goals and the measures need to be quantifiable and relate to short-, medium- and long-term considerations. The use of KPIs to measure deliverables related to the performance and achievements of the organisation assists the employer to measure the progress of its business strategy. Key Performance Indicators are used to measure progress in financial management, operations, marketing/public relations, sales/customer relations, human resources and leadership. The CEO’s KPIs set by the employer should be at a strategic level using data that is accessible and accurate for measurement purposes. Performance indicators may be changed over time as various milestones are achieved, and are then recalibrated to reflect the changed circumstances. For example, it may be that one of a CEO’s KPIs is to obtain accreditation with a regulatory body or a particular supplier. Once this is attained, the KPI may be changed to maintain the accreditation. The establishment of KPIs is important, particularly in the early stages of the CEOs tenure. Some organisations ask the CEO to prepare an initial impressions report on the organisation. This will typically occur

after about three months when the CEO has had an opportunity to form some initial views and impressions. If this exercise is undertaken, it presents as a good opportunity to review the KPIs and identify any refinement that may be required. Performance reviews All employees, including the CEO, should ideally undergo an annual performance review. The purpose of the performance review is to assess previous performance and set future goals. Performance of the CEO can be assessed through 360-degree feedback with the senior management team, external primary stakeholders (who interact with the CEO) and the organisation’s performance over the previous 12 months. A 360-degree feedback is a process by which confidential, anonymous feedback is obtained from subordinates, peers and superiors as well as from external sources such as customers and suppliers. This feedback, along with a self-assessment, provides a comprehensive assessment of the CEO’s performance. Issues arising from the performance review should not come as a surprise to the CEO because this exercise aims to review performance and set goals. Goal setting should be SMART (ie specific, measurable, agreed upon, realistic and time-based) and linked to the employer’s strategic plan, KPIs and monthly or bimonthly reporting. A CEO review committee Some organisations have a sub-committee of the governing body which is charged with setting the KPIs and then monitoring and reporting on the CEO’s performance. Such a committee would usually also make recommendations on the remuneration for the CEO. Performance improvement If performance issues arise at any time during the year, they should be addressed and managed at that time, rather than ignored and kept for the performance review. It is important not to confuse or conflate performance reviews with performance improvement. Performance reviews are the formal measurement of employee performance that may not be obviously very good or very bad. Performance

improvement is a more continuous process that is generally triggered by obvious performance defects. That is why improvement planning should not be deferred to the annual review. Good faith obligations require that an employer must: • communicate any problems of performance when they arise • specify the standards of performance that are required, and • provide the employee with the time and opportunity to remedy problems of performance. In the public sector, these steps are generally incorporated into what are known as performance improvement plans. They are recorded in writing and filed in the employee’s personnel file. The accepted period of these plans is three to six months, during which performance is required to improve if the employee is to avoid disciplinary action. The CEO also has obligations of good faith that require advising an employer of any obstacles to performance as they arise, so that problems can be resolved. The employer should: • provide regular feedback on CEO performance • identify problems of performance when they arise • assist with the resolution of problem performance • set reasonable time limits for performance improvement • be clear about the consequences of failures to improve performance. The first steps in the management of poor performance are to: • identify and record the performance problems and provide them to the employee • incorporate in the record suggested ways to resolve the problems

of performance • specify the dates by which improvement is expected • outline the consequences of failure to improve (including disciplinary steps). The test of an employer’s disciplinary measures is what a fair and reasonable employer in similar circumstances would do, if faced with the same problem.

¶908 Managing conflict This section describes the most common options for managing employment relationship problems concerning the CEO, which cannot be resolved by direct or usual relationship management interaction. The first section describes a simple process for receiving and resolving complaints about the CEO. The remaining sections concern problems between the employer and the CEO. Complaints from others The employer may receive complaints about the CEO from others, including employees, competitors, suppliers and those who come into business contact with the CEO. Talking through the issue with the complainant is a useful first response, because it has the potential to suggest the means by which the complaint can be resolved. If this does not resolve matters, verbal complaints should be put in writing by the complainant. The first obligation on the employer is to establish the veracity of a complaint. This usually occurs if there are independent sources of proof (eg documents). The second obligation is asking how the complainant wants the issue resolved. This need not be a complicated process, just a means of ensuring a complainant is given every opportunity to be heard, and it does not create an obligation on the employer to do what the complainant wants.

The requests should be made in a way that suggests an open mind/neutral attitude to the complaint. This process helps the employer to form a view about the complaint by ensuring a reasonable opportunity to provide relevant information has been given. It also rebuilds any trust in the organisation that may have been lost. It is important, however, to remain neutral and to ensure that no views about the merits of the complaint are expressed until all facts are available. If the complaint needs to be progressed, its details should be given to the CEO. It is possible, at this stage, that an open and direct conversation about the complaint and its resolution will be sufficient to deal with the matter satisfactorily to all. If not, options for investigating and resolving the problem (in-house or outside specialist) should be considered, dependent on the seriousness of the issue, employer policies about such processes, inhouse expertise, the likelihood of escalation to outside authorities. Suggested steps for an in-house investigation of a complaint against the CEO • On receipt of the written complaint, copy it to the CEO and agree a time to discuss it. • If the discussion fails to resolve the issue (to the investigator’s satisfaction), seek (from the complainant and the CEO) more details, relevant documents, and speak to others with information about the issue. • Read the additional information provided and interview those others whose names have been provided. • Reach a conclusion, set it out in writing and provide that to the CEO for comment. • Incorporate any new issues raised by CEO (and investigator’s conclusions about them) in final record of investigation. • Ensure final record includes:

— the facts surrounding the complaint — if there is a conflict about the facts, the version preferred by the investigator — conclusions about the complaint — if complaint established, how it should be resolved. Private sources of assistance Private providers offer a range of approaches to employment problem resolution, so an employer should decide which approach would best suit the presenting problem before seeking help. The good faith obligation for dispute resolution is based on the idea that facilitation/mediation (talking through a problem in-house or with an independent facilitator or mediator until resolution occurs) is the most efficient way to begin, because it has the highest success rates and is less likely to result in escalation of a problem to a dispute or conflict that requires outside assistance. This is reflected in government advice about resolving employment relationship problems on the New Zealand at Work website: www.employment.govt.nz/. Reliance on arbitration requires the consent of both parties. Lists of those offering private facilitation, mediation, and arbitration services are kept by AMINZ (Arbitrators’ and Mediators’ Institute of New Zealand Inc): www.aminz.org.nz. Public Dispute Resolution Institutions The publicly provided sources of assistance for employment relationship problems are: • Mediation Service (supported by the Ministry for Business, Innovation and Employment) • Employment Relations Authority • Employment Court.

The services offered by the Mediation Service are free, the Authority and the Court each require the payment of filing fees and hearing fees. Parties seeking help must first call the Mediation Service. A phone call to the nearest Mediation Service office is all that is required to obtain mediation assistance. The Authority is the next step for those who cannot resolve their problem at mediation. It investigates the problem and determines its resolution. It does not require that the parties to its investigation are represented (by union or employer advocates or lawyers), but many parties engage specialist assistance. Parties dissatisfied with an Authority determination may challenge its findings in the Employment Court. Specialist assistance with this step is recommended. Agreements Settlement Agreements Parties in dispute can resolve their own employment problems — with or without the assistance of others. The record of such resolution is known either as a Deed of Settlement (if money is involved) or a Settlement Agreement. Such agreements record the fact of a dispute, the terms of resolution and, commonly, a term ensuring confidentiality. Once signed they bind the parties in the same way as if the settlement was an order of the Authority or the Court and, if sealed (by the Authority), can be enforced by the District Court. Records of Settlement The agreement that parties reach following a mediation at the Mediation Service is generally recorded by the mediator in a document known as a Record of Settlement. The consequences of signing a Record are required to be explained to the parties, and their agreement affirmed, by the mediator before it is signed. Once signed, the terms of a Record of Settlement cannot be used as evidence in any court or tribunal, except for enforcement purposes. It has the same status as an order of the Authority or court, its terms cannot be cancelled (without consent of both parties) and it can be enforced by

compliance order from the Authority. Breaches of any terms of settlement are liable to a penalty imposed by the Authority.

¶909 End of relationship Resignation Resignation is the termination of the employment relationship by the employee. Since this is the most common way to end an employment relationship, it is usual for employment agreements to provide for: • the way a resignation should be made (commonly there is a requirement that it should be in writing) • the period of notice between notification of resignation and the last day of work. A common notice period for CEOs is three months. This allows sufficient time to recruit a replacement. For other employees, one month (or four weeks) is the usual notice period. In the event that an employer does not wish to have the employee work out their period of notice, the employer can, upon receipt of the notification of resignation, pay the employee the salary and other benefits the CEO would have received during the notice period, in return for an immediate departure. Garden-leave arrangements are common where the employer wishes to keep the employee on the payroll until the notice period expires, but does not want them in the workplace. Redundancy In the event that a business is sold, merged with another or changed such that the CEO is surplus to the employer’s requirements, an employer can terminate the employment relationship for redundancy, but only if: • the business proposal for change is provided to the CEO (and others affected) before any final decisions are made

• the employees are given a reasonable time to comment, respond, suggest alternative ways to achieve the change objectives • the employee responses are considered or taken into account in the final decisions made about the business. This process is known as a consultation process and it must be undertaken if an employer is to avoid claims of: • breaches of the duty of good faith • unjustifiable dismissal. If the business is to be sold or transferred to another owner, the employer is required to ensure the CEO has the right to: • have their employment agreement contain protective provisions concerning the negotiations between the old and new employers about the transfer of employees • choose whether or not to transfer to the new employer. Dismissal Dismissal is the termination of an employment relationship by the employer, who is required to have a reason (justification) for it and to carry it out by a fair process, if the employer is to avoid the consequences of a personal grievance claimed by the dismissed CEO. In other words, dismissal must be for cause. Common reasons for (justifiable) dismissals are: • misconduct or serious misconduct by the employee • failure by the employee to meet the performance requirements of the position • physical or mental incapacity of the employee • abandonment of employment (ie unexplained absence of employee from work for a period of time).

If dismissal is the result of CEO misconduct (or serious misconduct), the employer is required to: • ensure that the CEO knew, or ought to have known, that the conduct at issue would not be tolerated and could result in dismissal • thoroughly investigate the allegation of misconduct • obtain the CEO’s evidence or response to the allegation/s during the investigation • conclude that misconduct occurred only after taking all relevant matters into consideration • consider other disciplinary options, short of dismissal, like warnings • give the CEO opportunity to provide reasons why dismissal should not occur. If the dismissal is the result of poor performance, the employer is required to: • specify the performance problems to the CEO • suggest ways to resolve the problems of performance • give the CEO time to improve. If the dismissal is the result of incapacity — commonly following an accident or serious illness, the employer is wise to: • obtain independent advice (eg medical report) about the CEO’s condition and future prognosis • discuss it with the CEO (or their representative) • draw the conclusion from the evidence available that the incapacity will be long term or permanent or incapable of

accommodation by long term leave/sick or medical leave. Employers are required to provide the reasons for a dismissal in writing. The standard by which a dismissal is assessed, should it result in a personal grievance, is an objective one: what a fair and reasonable employer in the same circumstances would have done. Negotiated exits Negotiated exits result from an agreed termination of the employment relationship by both employer and CEO. They commonly arise: • during investigations into alleged misconduct • during performance management processes • following the onset of incapacity • during business changes at senior executive or management level. They usually involve payments (or other benefits) to departing employees over and above the usual notice and holiday pay entitlements, or periods in which an employee takes garden leave (ie absence from the workplace) whilst continuing to receive their usual salary and other benefits. Some businesses incorporate into the employment agreements of senior executives an agreed amount payable in the event that the employer wishes (for any reason) to end the employment relationship (see Relationship Review above at ¶903 — Potential additions). There are few hard and fast rules for negotiated exits. The exception concerns jumping the gun. This requires an employer who wants the relationship to end to refrain from making that clear to a CEO who does not share that view, or is reluctant to move on. The employer should seek independent advice about the issue, if grievances and conflict are to be avoided. The major advantages of negotiated exits are that:

• they can be kept confidential • they eliminate (or reduce) the need for dispute resolution services • they achieve certainty of outcome. It is usual for employers and CEOs who accept the relationship should end to each engage a specialist employment adviser (HR professional, lawyer or employment advocate) to advise about exit terms. Where there is conflict about the idea of terminating the relationship, each party should obtain their own specialist advice as soon as it is apparent that ending the relationship is a possibility. Early recourse to specialist advice is important. Negotiated exists should be recorded in a settlement agreement, deed of settlement or record of settlement (see above at ¶908). The recorded settlement can be accompanied by a separate document, a record of employment that specifies the dates on which the employment relationship began and ended, and any other matters concerning the relationship that the parties agree to include. It should not include statements that the employer would not be prepared to defend. Communicating the exit of the CEO Whatever the method or reason for the departure of the CEO, considerable care should be taken around the communication of this matter. It is important for the company to maintain the confidence of its staff and key stakeholders. The departure of a respected CEO may impugn this, or if the departure is due to the poor performance or conduct of the incumbent, this equally can raise issues of confidence in the organisation. It is important that the company also have prepared communications regarding its intentions for the interim period until a permanent appointment is made. This is important for maintaining the confidence of staff and stakeholders, and demonstrating the governing body is exercising appropriate oversight of the company’s direction and

operations. Final note The CEO is usually an organisation’s most important or valuable employee. Investing in good employment relationship practices takes time, patience and effort (and often some changes to long-held assumptions) but is always worthwhile. Recognition of when to seek outside help and advice is also very useful. Adopting best practice is the first step to avoiding the unnecessary cost and damage caused by poor CEO management. Checklists

Figure 9.2: Checklists

Action Recruitment — Why has the position of CEO become vacant (eg resignation of incumbent, new direction required for the organisation)? — What are the company’s requirement (eg organic growth, growth by acquisition, consolidation, refocussing on core business)?

Assigned Completion to date Notes/comments

— Has an analysis been completed on the skills required for the CEO position (eg marketing, HR restructuring, change management)? Individual employment agreement — Is the position description included and what specific factors does it address (eg personal attributes, key relationships, objectives of the role)? — Has consideration been given to provisions regarding nonsolicitation and restraint of trade provisions? — Has the remuneration package been independently benchmarked? — What additional benefits if any is it

proposed will be offered in the remuneration package (eg additional leave entitlements, personal use of a motor vehicle, carpark, membership fees)? Checking academic qualifications and professional membership credentials — Is there an authority on file from the candidate giving specific authority to obtain verification from the named organisations for academic qualifications and/or professional memberships? — Who is responsible for verifying the credentials? Has a police check been undertaken and will a credit check be undertaken?

— If so, who is responsible for ensuring they are completed and to whom are the responses reported? Have referees been spoken with? — Have specific questions been prepared to be asked? Has the personal information of the unsuccessful candidates been destroyed/returned to the candidate or otherwise dealt with in accordance with their instructions? Has an HR file for the CEO being created with, for example: — a signed copy of the IEA? — copies/confirmation of academic and professional credentials? — police check and credit reference (if

undertaken)? Pre arrival — Who is responsible for advising staff and key external parties of the appointment and the start date of the new CEO? — Is it necessary or desirable for the new appointment to be published (eg in a newspaper or professional trade magazine)? — What biography (bio) will be included in any statement publishing the appointment? Induction — Who is responsible for the induction of the CEO on their arrival at the business and for acquainting them with functional aspects of the business (eg delegations so that the CEO has

authority to perform their functions from commencement and not being required to wait for a subsequent board meeting to receive the delegations)? — Has a plan been prepared, which introduces them to staff and key external parties? Performance assessment — What process is in place for agreeing the key performance indicators? — What process is in place for monitoring and assessing the CEO’s performance in accordance with the agreed KPIs (eg three-monthly or six-monthly reviews with the board or a subcommittee of the

board)? — Is there a process to review the KPIs after a period of time in the role? KPIs — setting an appropriate range Do the KPIs encompass all aspects of the business, for example: — vision leadership and strategic development? — leadership of people and performanceoriented culture? — operational delivery (eg preparing and reporting on business plans and operating within the agreed budgets, no regulatory breaches)? — customer and stakeholder satisfaction? — communication with stakeholders?

KPIs — measurement and outcomes — Has the expected outcome been clarified in detail (SMART) (eg an improving staff or customer satisfaction rating)? — Are the KPIs measurable (eg using staff satisfaction surveys, or customer satisfaction measures)? — What timeframe is allocated to their measurement? — How and on what frequency are they reported on (eg quarterly at board meetings or quarterly CEO performance review meetings)? — Have they been achieved, or not achieved? Initial (or first)

impressions report — Is the CEO preparing an initial impressions report, after approximately three months in the role providing observations, comments? — Does it lead to a realignment or refinement of the strategy? Continuing professional development — Is there a clear and agreed plan for continuing development and education? — Is there a process for this to occur on an annual basis? Resignation and departure — How will communication of this to staff and key stakeholders be managed? –

Will there be an agreed statement

issued (usually by the Chair of the organisation)? — What communications will be made regarding interim arrangements and the appointment of a permanent CEO? — Is there evidence (email or signed letter) of acknowledgement of the letter of resignation on the file? — Is there certainty regarding the departure date? — Have all email accounts and authorities been cancelled on departure? — Is all company property back with the company (eg iPad with proprietary information)?

Chapter 10: BOARD MEETINGS: AGENDAS, MINUTES AND THE RESOLUTIONS REGISTER Editorial information

Karen Martyn

¶1001 Introduction Boards are groups of people whose sole purpose is to make decisions on behalf of a separate entity, whether it is a limited liability company, an incorporated society or a trust. These decisions made in a duly constituted meeting are formally known as resolutions. This chapter explains how to structure Agendas, Minutes and use a Resolutions Register — key procedures like the rules of the road that help everybody do a better job and enjoy the process more. Good Agendas and Minutes can actually help ensure that the substantive issues are addressed efficiently and that the meeting process builds, or at least maintains, respectful working relationships. The elements that are covered in this chapter include: • Agenda • Minutes

• board papers and discussion using formal decision-making procedures • Meeting Rules and voting • chairing the meeting • use and purpose of committees, and • governance policies.

¶1002 Meeting Notice and Agenda The requirement of the Companies Act is that Notice of a board meeting must be not less than two days prior to the meeting and it must be sent to every director who is in New Zealand. The Act states that a director — or an employee of the company, if requested by a director — may convene a meeting of the board by giving Notice. The Notice must include the date, time, place of the meeting, and, importantly, the matters to be discussed. In practice, many boards combine the Notice with the Agenda, as the matters to be discussed are sufficiently detailed by the Agenda. If you are using the Agenda to serve as Notice, the Notice requirements must be met and incorporated into the Agenda. Note: In this chapter, the terms Notice and Agenda are used interchangeably with the proviso that the Notice requirements are satisfied by the Agenda and are thus equivalent.

An irregularity in the Notice can invalidate the Notice and thus potentially the meeting and all decisions made in the meeting. Irregularities include less than two days’ Notice, omission of someone entitled to receive Notice, some other error or omission (eg of the date, time, and place of the meeting) or insufficient detail about the matters to be discussed in the Notice. Irregularity in the notice can be waived if all directors entitled to receive Notice of the meeting attend the meeting without protest as to the irregularity, or if all directors entitled to receive Notice of the meeting agree to the waiver. If you should minute a meeting of the

board where there are Notice irregularities, be sure to record the agreement to waive the Notice requirements in the Minutes. This will help avert potential claims later of technical reasons for voiding the meeting. The business to be dealt with at the meeting should be stated adequately and candidly in the Agenda. In particular, significant business to come before the meeting needs to be clear and in sufficient detail. The purpose of this requirement is to enable the directors to know what is proposed to be done at the meeting, so they can decide whether or not to attend. The meeting may not deal with matters outside the scope of the Notice for that board meeting. Most constitutions require that the Notice states the exact wording of any extraordinary or special resolutions. Special resolutions may be proposed for an ordinary or special meeting of the board. The Agenda must make it clear if a motion is a special resolution. Item headings such as “any other business properly brought forward” or “General Business” are insufficient for the purpose of satisfying the requirement of sufficient detail. Consequently, any resolutions that were passed under this would not be binding due to insufficient detail in the Notice. Agenda Please note that this chapter covers the traditional order for meeting Agendas. New research strongly recommends that the most important items for decision-making should be addressed first while the group is fresh as decision fatigue negatively impacts judgment. Recommendations for better meeting practices include dealing with most difficult, complex decisions first (usually strategic) followed by operational matters and ending with compliance matters, such as financial reports, Minutes, etc. Every meeting begins with confirmation of a quorum (which is documented by recording attendance, apologies and unnotified absences1) and with updates and changes to the Interests Register (see chapter ¶2 for more information on conflicts of interest).

Late items At this point, the chair may ask for any additional items (also referred to as late items) to be added to the Agenda. Board members should be alert to the risks of adding late items. They should only be added if: • they cannot be deferred • all the required information to make the decision has been circulated • all board members are present and agree that they have had adequate time to familiarise themselves with the information and make an informed decision, and • all board members agree to waive the irregularity of Notice of the item(s). The addition of late items is sometimes used as a technique to add items with little information, provide no preparation time, and give the appearance of urgency in order to rush through decisions that board members might not otherwise agree to when provided with adequate time to consider and discuss. Most importantly, if any board members are absent, the meeting should not make decisions about items that were not notified in the Agenda. Absent board members would have a legitimate right to dispute and potentially overturn any such items. Minutes of previous meeting Traditionally, the Minutes are verified by the chair of the meeting, rather than confirmed by the meeting itself. The Companies Act specifies this for company meetings, but leaves it to the board to determine its own proceedings. The decisions recorded in the Minutes need no confirmation. As soon as the decisions were made, they were firm and binding, and capable of being put into effect. Unless otherwise stipulated, the chair is empowered to verify the Minutes as soon as the chair is satisfied they are correct and accurate.

The purpose of the common procedure of having the chair sign the Minutes at the start of the following meeting is in the nature of a safety measure. This procedure enables the chair, to ascertain whether those present at the current meeting are satisfied as to the accuracy of the Minutes as drafted. If there is any objection or query forthcoming, it can be raised before and not after the Minutes are signed. If the accuracy is queried, the matter can be attended to immediately. The practice of Minutes being circulated prior to the next meeting and prior to their being signed are means of avoiding the possibility of legal proceedings. What if a director believes that the Minutes do not constitute an accurate record? The director must say so immediately, stating clearly how she or he believes a particular Minute should read. Remember that the only allowable discussion is on the question of accuracy or otherwise of the record of what occurred at the previous meeting. Directors who disagree with a resolution or narrative, or inaccurately remember, cannot change or alter the Minutes. Courts have clearly and repeatedly ruled against any such behaviour. The Minutes are the official, permanent record of the business transacted at board meetings. The importance of Minutes cannot be overstated. They must be accurate and available in case they are required to verify the activities of the governing board. Minutes need to clearly reflect all decisions made, preferably in a formal consistent format. This allows readers to quickly identify topics and decisions while skimming the Minutes. For example, left margin alignment and use of bold type for highlighting significant decisions (eg “Resolved that”, “Approved”, “Recommended”, “Deferred”, “Declined”) draws the reader’s attention to formal board actions and decisions recorded in the Minutes (see Figure 10.2). Boards are strongly advised to keep and regularly update a Resolutions Register, as board members may either forget previous decisions on the same topic, or be unaware of them (see ¶1009). This should be available at every meeting to enable quick review of, and reference to, all previous decisions (and their dates) about particular topics. Copies of the Resolutions Register should be part of the directors’ induction manual and should be available on request to all

directors and the chief executive officer (CEO). An up-to-date Resolutions Register should be available to the board secretary at every meeting. Matters Arising Matters that are unresolved or incomplete from previous meetings are best presented in a table format (see the Minutes example in Figure 10.2). They should be recorded with an agreed task or action to be carried out, a deadline, and the name or initials of the person responsible for completing the task. To quickly note which Matters Arising are due at the current meeting, the tabulated items that are due can be highlighted in yellow. This indicates that other items are not yet due and may be skipped at this meeting (although those responsible should note the due dates). Completed and resolved Matters Arising are noted in the Minutes (in the Results column of the Matters Arising table) with the date when they are completed and any relevant comments. Once the completed items have been recorded in the Minutes as completed, they are deleted from the Matters Arising table for the next Agenda. If a board member (or a manager) does not complete an action on the due date, the new assignment date (ie the board meeting date) and new due date are added, retaining the original dates and each subsequent date as a record of commitments made (and not kept). When a board sees an action assigned again and again, it needs to determine whether the delays in completion are out of the control of the person assigned, or the person is not performing. This is the time for a performance discussion. Lack of timely performance needs to be addressed in a timely manner; it should not be held over until the annual performance review or board evaluation. Even volunteer boards (ie where board members do not receive remuneration) must set and enforce performance standards. If boards fail to set and enforce performance standards, they are likely to have problems retaining management’s respect and holding management accountable for its performance. Resolutions and other decisions are recorded in the Minutes and then copied to the Resolutions Register (see ¶1009). However, any actions

required as a result of a decision are recorded as Action Items in the Minutes and these action items are then added to the next meeting’s Matters Arising table. Actions required to implement Resolutions should be italicised, preceded by the label “Action” with details of what the action involves, who is responsible and the due date for completion (see examples in Figure 10.2). Regular Agenda items After the Matters Arising have been dealt with (and these may take a large portion of the meeting), regular Agenda items such as financial reports and the CEO’s report may be discussed. These and many other regular reporting matters are usually historical reports of what has happened. Thus, by definition, these reports are not strategic (ie they are usually administrative or operational) and decisions may not be required beyond accepting the reports after noting their content. For this reason, and because boards are meant to focus the majority of their time on strategic rather than administrative or operational matters, these reports are best submitted with the Agenda, just as all papers for the board meeting should be submitted with the Agenda. This allows board members time to read the reports before the meeting where they may be formally accepted without need for any discussion, unless they meet the criteria for exception reporting (see below). Agendas should be circulated one week before the meeting to allow busy, part-time directors sufficient time and opportunity to give them due consideration. Exception reporting When the information reported is not within expected parameters that have been previously agreed, it is exceptional and worth an explanation. This is known as exception reporting.

Example An ambulance service has a target response time of eight minutes for all call-outs, with normal variation of 25% (ie two minutes) in either direction. Thus, monthly

reports of response times which are between six and 10 minutes do not require any discussion at the meeting nor explanation in the monthly report. A response time of 12 minutes is exceptional and requires an explanation in the CEO’s report. The explanation may be that response times were slower than usual because of more dangerous road and traffic conditions caused by heavy rain.

Reporting as in the example above is readily understood and can be accepted without discussion at the meeting. To aid directors in reviewing reports, data within pre-agreed normal variation parameters can be displayed in black while data/matters outside those parameters may be displayed in red. There are two major benefits to exception reporting: • There is no need to discuss historical data when it falls within forecast parameters, which saves time during board meetings. • It obviates the need for unnecessary defensive explanations by management for normal variation. When variation is outside the agreed parameters, it should be accompanied by an exception report explanation. This should be concise, highlighting the difference between the planned results and the actual results. The report should specifically state whether management considers that the variation is a one-off event requiring no further action or whether it is something that may require board input. If the variation requires a board decision, the matter should be added as an additional Agenda item to be discussed. New business New business is usually the last Agenda item. Matters of new business, like all matters that require the board to make a decision, should be presented in the management and board report format (see ¶1004) which clearly defines the issue in the first step and then clearly seeks a decision in the last step (ie the recommendation). Board-only time

One last recommendation for board Agendas concerns board-only time. Normally the CEO, and sometimes the chief financial officer (CFO), attends all board meetings. This is critical for the board to get immediate feedback on all matters from the person or people responsible for implementing the decisions of the board. Frequently, however, the CEO is not a board member and the board requires regular meeting time without the presence of management. From the board’s point of view, this board-only meeting time is best scheduled regularly at the start of each board meeting so that board members can discuss and raise openly any matters they particularly want raised later with the CEO at the meeting. However, from the CEO’s point of view, there is nothing as frustrating as waiting to be called into the board meeting (like a student waiting to be called into the headmaster’s office). To satisfy both the board’s need for sufficient discussion time and the CEO’s time constraints, the first 30 to 60 minutes of the board meeting could be scheduled as board-only time. If required, board-only time could be continued after the discussion of Agenda items with management present has been completed. Note that boards that are “captured” and driven by the CEO require little time for board-only discussion. Boards should recognise the “CEO-capture” situation and resolve it speedily.

Figure 10.1: Board Meeting Agenda Example ABC Company Board Meeting Agenda 6 March 2016 Directors

Abigail Adams (Chair) Debbie Wyatt (Deputy Chair) Stephanie Boyle Darren Jones

Dione Smith Apologies Greg Martin Attending

Doris Day (CEO) Karen Martyn (Secretary)

1 Interests Register 2 Minutes [Approval of the] Minutes of the meeting of 2 February 2016 (attached). 3 Matters Arising Date Assigned

Responsible Task

Due Date

271015

DW

Call CSA and 060316 investigate initiatives/speakers for 2016 with a view to bringing to NZ.

271015

AA

Meet David Jones to discuss MOU and collaboration.

10915

GM

Send chair the 071015 RLNZ board Position Description for her review.

060316

271015

231115

071215

240116

020216

060316

Comments

271015

KM

Add review of ecommerce facility via DPS ($2,400) to board Agenda for March 2016.

060316

071215

KM

Instruct IT to upload Lync software for new directors (DJ and DS) for January online meeting.

160216 080216 done

071215

AA, DW

Follow up on chair 080416 and deputy chair media training.

071215

CEO

Add Code of Conduct to policies on website and in Company Policies Manual.

211215 done

071215

CEO

In weekly email to employees include a copy of the Code of Conduct and inform them policies are on website.

211215 done

020216

CEO

Prepare industry research proposal for next board meeting.

060316 attached

4 Financials Approval of January 2016 financial reports (attached or circulated

previously on X date). 5 CEO Report (attached) New Business 6 Industry Research Proposal to commit $50,000 toward industry profile research (attached). That $50,000 is added to the budget for industry profile research to be completed within six months. 7 Marketing Strategy and Policies Review Report from the marketing manager (attached) (see also board Strategy attached). Next Meetings Note: Bold type indicates in-person meetings at HQ unless noted otherwise. Mondays 8.30 am–12.30 pm

online meetings via Lync

26 March

via Lync

12 April

post notice to members prior to AGM (14 business days)

27 April 11 am–4 pm

board meeting

27 April 4 pm

AGM

28 May

via Lync

25 June

Christchurch

30 July

via Lync

27 August

via Lync

27 September 29 October

via Lync

26 November Footnotes 1

Notified absences are recorded as Apologies.

¶1003 Meeting Minutes The Minutes are the legal record of the business transacted at the meeting. The board secretary records the meeting’s proceedings and decisions as they occur and prepares the Minutes at the conclusion of each meeting. Minutes should provide an accurate, objective account of meeting proceedings and all decisions made. Under the Companies Act 1993, Minutes of meetings must be kept, signed, made available to directors and preserved as a record. Numerous legal cases have confirmed the sanctity of the Minutes; indeed Chartered Secretaries New Zealand (now Governance New Zealand) refers to the Minutes as “Letters to an Unknown Judge”. The discovery of Minutes is to be expected in any investigation of a company (societies and trusts too). Directors may be fined for failing to keep proper company records. See the Minutes example in Figure 10.2 below. Boards are strongly advised to engage a suitably qualified and experienced chartered secretary who can be contracted to assist and advise the board on proper meeting proceedings and good governance practices.

Figure 10.2: Board Meeting Minutes Example ABC Company Board Meeting Minutes Tuesday 22 December 2015 Directors Present

Abigail Van Hoff (Chair) Andrew Jones (Deputy Chair) Bryony Taylor Heather Healer

Attending

Katherine Martin (CEO) Bruce Brandon (Secretary)

Meeting opened at 11.07 am 1 Minutes Approved the Minutes of the meeting of 1 December 2015 as a true and correct record. Unanimous Approval 2 Matters Arising/Action List Date Assigned

Responsible Task

Due Date

180515

BB

011215

Formalise

Comments

(document in new Constitution) relationship with subsidiary. 011215

210216

280915

Directors

Directors to 100216 do remuneration review and performance review of GM within one month of anniversary date of 10 January.

011115

BB

Schedule March Governance 2016 Audit for March 2016 using the NZ Governance Guidelines as the basis.

201215

AVH

Complete formal induction of HH.

201215

AJ

Arrange 310116 meeting with XY Company to discuss

310116

collaboration projects. 201215

BB

Send revised meeting schedule to all directors.

201215

KM

List all accounting contracted services, charges, payments to date and issues.

201215

KM

Instruct IT to add chair to Microsoft Office 365 so she can initiate online Lync meetings with other directors.

Meeting recessed 1 pm–1.15 pm for lunch 3 Financials Questions for Accounting Service:

Done 221215

200116 Note: Board instructs not to use landlord as auditor or accountant as it would provide financial information that might bias rent negotiations. Done 221216

(1) Please provide assets list with original and current book value for equipment and plant and equipment accounts. (2) Please explain under current liabilities the $120,000 accruals. Accepted the financial reports for November 2015 with suspense items to be identified. Unanimous approval Action: KM to list all accounting contracted services, charges, payments to date and issues 281215 Approved Budget 2016 as revised (attached). Unanimous approval 4 Monthly Reports from Puni Subsidiary Ltd Action: KM to arrange meeting with Puni Subsidiary to discuss collaboration projects 310116 5 Client Survey Results — deferred 6 Employee Personal Grievance Approved offer to settle ($1,500) as commercially practical. Unanimous approval 7 The Board and Directors Action: Secretary to complete formal induction of HH by 310116 Action: Secretary to send revised meeting schedule to all

directors ASAP Action: KM to instruct IT to add chair to Microsoft Office 365 so she can initiate online Lmeetings with other directors by 221215 Meeting closed 3.15 pm

¶1004 Board papers and discussion The board of directors should be at the forefront of strategic change in an organisation. The directors decide whether to embark on adopting new information technology (IT) systems, approve remuneration scales and collective bargaining strategies, approve marketing campaigns and strategies, and decide financial decisions, as well as all other organisationally significant initiatives. The board papers and the discussion leading to board decisions should be structured in a way that facilitates and supports effective collective board decision making. Decision-making procedures In board meetings, when board members pool their knowledge and skills, the board can make better, more informed decisions than any one member could do alone. However, throwing information into a pot and expecting people to sort through it and come up with the best option is unrealistic. Collective decision making about complex issues requires structure and process to gain the benefits of many minds. Formal decision-making procedures (see Figure 10.3 below) give the board support and guidance for effective collective decision making. Acknowledge that this is a very simplified version of a decision-making methodology. If you are not using any, start with this then use more robust methods as your board’s comfort and skill increases. The five-step decision-making methodology starts by defining the problem and ends by selecting the best option. Each step must be completed to everyone’s satisfaction before moving on to the next step. The five steps are: Step 1: Define the problem. What exactly has to be decided?

What is the problem with the current situation (or what will become a problem in the future if nothing is done now)? It is important to focus everyone on the same definition of the problem. Step 2: List and prioritise the criteria that a solution to this problem must meet to satisfy, to the best extent possible, all legitimate interests. Criteria could be cost, keeping past promises, functionality requirements, integration with other systems/procedures, consistency with values, meeting deadlines, etc. Step 3: Brainstorm and list all the options or alternatives to resolve the problem, including doing nothing. Document and post this list for everyone to see (flipcharts, SmartBoards, PowerPoint can all be used). Step 4: Evaluate the positive and negative consequences of each option or alternative, using the criteria agreed in Step 2. Record these next to each option where everyone can see. This helps the chair remind members when they overlook positives or negatives of an option. Step 5: When Steps 1–4 have been completed, select the option or solution that best meets the agreed criteria, maximises gains and minimises negative consequences, and is in the best interest of the entity. To make a collective decision, all the board members must reach a “meeting of the minds”. This does not simply mean that a majority of members vote the same way but rather that they all decide for the same reasons (ie on the same basis) that one option is the optimal solution. To decide on the same basis, they must use the same explicit criteria for assessing which option is the best (as required by Step 2) — not their own personal judgment. It helps if the board records each step on a flip chart and keeps it in view throughout the discussion. This allows members to refer back to the outputs of previous steps while working on the current step. If a member suggests something (eg a potential solution at Step 3) while

working on an earlier step, the chair can record the suggestion on the flip chart sheet for that step then guide the group to return their attention back to the step they are working on. Following a decision-making methodology has numerous benefits: • Following procedures promotes an organised approach to decision making by encouraging members to focus on the same step at the same time. • Following procedures can prevent counterproductive group behaviour (eg criticism of suggested solutions during brainstorming sessions), focus discussion on one topic at a time, avoid the problem of a few members dominating the discussion and others not sharing their views and information, and help deal with unacknowledged conflicts by raising them for discussion. • By requiring participants to agree on criteria for evaluating whether proposed solutions are acceptable, it focuses conflict on the substance instead of allowing it to become personalised (ie if one member criticises another member’s ideas or views). • Decision-making procedures give boards a sense of progress and direction; at each of the five steps, members know how far they have come and what remains to be done. • Committing to following a decision-making methodology gives boards a basis for self-evaluation (ie for asking if they have followed good decision-making procedures), which can help improve the boards’ future performance. • Give members a feeling of empowerment because they ensure that the whims and prejudices of more powerful board members do not dominate. The procedures become the basis for correcting and redirecting board discussions and provide the chair with objective Meeting Rules to follow and enforce. • Decision-making procedures can counteract passivity by forcing board members to exert more effort to complete each step before

moving on to the next one. • Board members can feel satisfied that logic and rationality rather than individual bias or power plays guided their decision making. • Decision-making procedures enable the chair and other members to draw the board back into constructive discussion without being accused of personal attack. • Decision-making procedures help groups take advantage of the collective potential of their members and avoid the natural impulse of jumping straight to a solution that so often characterises decision making. Following decision-making procedures improves board decision making because this methodology counteracts sloppy thinking and ineffective work habits, which are part and parcel of everyday group interaction. Because the procedures are structured, they may feel “unnatural” and uncomfortable until mastered. However, the benefits of effective and more satisfying collective decision making far outweigh the initial learner discomfort. • Using a decision-making methodology provides a basis for directors to defend any challenge that they have not discharged their obligation to take proper care in making decisions. The chair and other board members must be capable of ensuring that the board completes each step (ie defines the problem, identifies criteria for an optimal solution, considers all options, evaluates all options, and then selects the best solution) rather than simply jumping straight to a solution, as boards so often tend to do. Personal biases are part of human nature but their influence in board decision making can be reduced by following decision-making procedures. By establishing robust problem analysis, solution generation and evaluation methods, as well as productive decisionmaking rules, decision-making procedures can help counter a chair’s tendency towards directive or closed leadership and reduce the likelihood that a board will succumb to defective decision-making

processes. Both written reports and board discussion should follow the management and board report format outlined in the decision-making procedures. The format for submitting recommendations and requests for decisions to the board should also follow this structure and be formally adopted as part of the board’s policies. If the board receives all its information in the management and board report format, discussion time is reduced because the information is organised in the same order that the board will follow to discuss the problem and reach its decision.

Figure 10.3: Decision-making Procedures Policy ABC Company Management and Board Report Format All reports submitted to the board of ABC Company need to be in the prescribed format to assist the board in understanding: (1)

exactly what action is called for

(2)

what the problem/issue is (definition)

(3)

what the criteria for a good solution/decision are in this instance

(4)

what the available options are (all options including status quo/doing nothing)

(5)

how the options meet/do not meet the criteria, and

(6)

the recommendation to the board.

Due Dates Monthly management reports are to be prepared and available by the tenth business day of each month for the reporting period of the preceding month. This enables the reports to be sent to the board with the monthly Agenda, financials, etc. All reports are submitted to the board secretary who collates them and prepares one packet for the board. Reports submitted after the

deadline may not be included and will be recorded as received late. Any reports, requests for discussion, etc, from board members are to be prepared and sent to the board secretary no later than the twelfth day of each month for inclusion on the Agenda. All reports, requests for discussion, etc, should be in the same board report format as management reports. Report and Discussion Item Format Criteria The board relies on management and sometimes its own members to investigate matters of interest to the company, problems, issues, etc. For the board to make informed decisions about these matters, it must receive a report that meets the following criteria: (1)

The report must provide a clear defined description of the issues/matters under consideration. This narrows the problems and provides all members with the same understanding of the matters to be addressed.

(2)

The report must provide criteria for good solutions/decisions. For example, the ABC Company objects/purposes (from the Constitution) are the highest criteria, followed by the Board Annual Work Plan, company values and other criteria (eg keeping past promises, keeping within budget, etc). For a group to make a collective decision, everyone in the group must use the same criteria to arrive at a “meeting of the minds”.

(3)

The report must outline the options available (ie all options, including status quo/doing nothing). The board does not have the time or the full information necessary (nor wants to take the time) to come up with available options. It is the responsibility of the person writing the report/asking for the decision to demonstrate that all options have been assessed against the same criteria (ie

without bias). (4)

The report must indicate how the options meet or do not meet the criteria, preferably in a table format, to assist the board to quickly assess the report, checking the criteria against each option and confirming the assessment of the report writer.

(5)

The report must contain a recommendation to the board of what option optimises the outcomes while honouring the values and purposes of the company. This should be stated at the start of the report and the conclusion, preferably in a board resolution statement.

(6)

All pages should be numbered. Preferred font is Arial 11 (nothing smaller). Successful decision making relies on careful execution of RPS It would be a mistake to assume that by simply following the five-step rational problem-solving (RPS) procedures, a board will automatically make the best decision. What happens at each step and how well each step is executed are the determinants of successful decision making.

¶1005 Meeting Rules and voting Meeting Rules, also known as Standing Orders, specify how meetings are convened, who will be in charge, what the ground rules are, how decisions are to be recorded, who is eligible to vote and other similar matters. Meeting Rules are often found scattered throughout other governance documents. For example, the Constitution (or Rules or Trust Deed, as appropriate) often specifies the number required for a quorum, the frequency of board meetings (or at least a minimum per annum), and how the chair is appointed for the meeting, among other matters. The

Board Charter and other governance policies may specify the format of board reports, the standing committees required, the performance expectations of board members (eg meeting attendance) and other matters. Meeting Rules can be a separate document or incorporated into the Board Charter. Meeting Rules are necessary to ensure that everyone clearly understands the board culture (“how things are done around here”) and how it operates, as well as providing a means to legally resolve disputes within the board and between the board and other parties. The Meeting Rules should include: • procedures for electing and replacing the chair • the attendance of non-members (eg management, external advisers, stakeholders) at meetings • procedures for convening and adjourning meetings (including quorum, meeting frequency) • procedures for setting and distributing the Agenda • format for board reports • standing committees • voting procedures, and • procedures for managing conflict. Board Meeting Rules should be formally recorded in a Terms of Reference (TOR) document, typically the Board Charter, which spells out the board’s purpose, scope of activities, authority and how the board operates. Board decision making Board decision making occurs in board meetings with a quorum of board members present, whether in person or via audio links (so long as all members can hear all discussion at the same time). If the

Constitution allows, board decisions (formally called resolutions) can be made outside board meetings via Resolutions in Lieu of a Meeting. However, this method has significant limitations mainly because it does not usually allow for the appropriate level of discussion. In cases where full and frank analysis and discussion have already taken place and approval of the formal decision only requires confirmation of a material fact or event, decision making by electronic means may be appropriate. In most of these cases, however, a decision could be approved in a meeting subject to specified conditions being met by a certain date. Disadvantages of conventional Meeting Rules Conventional majority-vote Meeting Rules such as the “Westminster” parliamentary procedure, Robert’s Rules (the short title of a classic American work on parliamentary procedure first published in 1876) and local versions are not conducive to effective collective decision making. These conventional Meeting Rules support the tyranny of the majority, often leaving all parties, but especially the unhappy minority (which may be 49%), with an unsatisfactory process and result. Very few people are familiar with or have the time to learn these dense and impenetrable conventional Meeting Rules. Where conventional Meeting Rules operate, people who are familiar with them can steer and limit the debate to obtain the outcome they desire, regardless of the substantive issues. The better alternative is to adopt and use consensus-based Meeting Rules. Development of consensus-based Meeting Rules Fortunately the past two decades have seen the development and adoption of more appropriate, consensus-based Meeting Rules. New Zealanders are especially willing to adopt an inclusive approach to decision making that takes into account minority interests and seeks to achieve the best outcome for all affected stakeholders. These more modern Meeting Rules reflect the evolution in governance and group decision making. Under conventional majority rule, each member votes and the solution that receives the majority of votes is chosen. The majority-vote rule appears to be quicker than consensus decision making and to prevent

impasses. However, where decisions are made by majority vote, discussion ceases once the majority of group members are satisfied. Dissenting members’ views, and even perhaps unshared information that is critical to consensus or integrative decision making, may be withheld once a majority decision is reached. Consensus or integrative decision making, on the other hand, requires all members to agree to the decision unanimously. An integrative decision integrates many views; no other option exists that all members would prefer. The advantage of consensus decision making is that it strives to integrate preferences and perspectives and encourages trade-offs that are critical to integrative decision making. Under consensus decision making, the agreed solution must satisfy all board members to the greatest extent possible. Research shows that consensus decision-making groups do not require significantly more time to reach a decision than groups using majority rules. Furthermore, members of consensus decision-making groups are more satisfied with their own and the groups’ performance. Domination by a single member is less likely under consensus rules and fuller presentation of views is more likely. The legal structure of the board of directors dictates that directors are jointly responsible for board decisions. In fact, individual directors have no power or authority unless it is delegated to them by the whole board, which is rare. Board members, therefore, must strive to fulfil their role as a collective decision-making group. Consensus decision making promotes high-quality decisionss Decisions made by boards of directors must be of the highest possible quality. Boards should adopt consensual, integrative decision-making techniques that are likely to result in higher-quality outputs. Improvement in the board’s decision-making process, all else being equal, leads to better decision quality and improved organisational performance.

Board decision making should be genuinely collective Decision making by boards is different from individual decision making in that board decisions must: • be based on the best interests of the entity, supporting the entity’s purpose and values, not the values of the people who make up the board, and • be genuinely collective decisions, which are not just the sum of individual views. The procedures and guidelines in this chapter can help a board achieve effective collective decisions for the greater good of the company.

Figure 10.4: Meeting Rules for a Co-operative, Consensus-Style Board Meeting [Name of Company] Meeting Rules for a Co-operative, Consensus-Style Board Meeting The board’s Meeting Rules provide a framework for meeting conduct and debate. As a general practice, directors have agreed that meetings of the board and committees should be conducted as informally as possible. In order to achieve this and to make meetings as productive and efficient as possible, directors undertake to observe the following protocols. 1 Everyone participates — no one dominates The chair facilitates the meeting process, calling on one speaker at a time and thanking each speaker when his or her time is up. If a director has already spoken twice on the same topic, the chair may point this out and ask that other directors be given the opportunity to add their views and information to the discussion.

Directors will only make a point if it has not already been raised and is relevant to the topic. It is the chair’s role to draw out the quiet and control the loquacious. All directors will assist the chair to uphold the behaviour protocols agreed to by the board. Use your listening skills. Do not interrupt a speaker no matter how much you disagree. If the speaker is taking longer than five to 10 minutes to make a point or repeating the same information that has already been given to the meeting or making unacceptable personal attacks on someone present, raise your hand to get the chair’s attention (if the chair has not already intervened) and, when recognised by the chair, ask that the floor be given to someone with new or different information to enable an informed discussion. 2 Different opinions are welcome — all questions and observations are encouraged The purpose of having a group of people to govern is to take advantage of many points of view. If you have no opinion, you serve no purpose and should resign and allow someone with input to participate. Directors who occasionally abstain from discussion and/or from voting are not fulfilling their duty as a director and should be removed if they do not remove themselves quickly enough. 3 Silence is taken for agreement — if you disagree, you are obliged to so state Every director (but especially the chair) should stimulate contributions by actively seeking information and opinions from others in a sincere manner, using open-ended questions. (“Why do you think it won’t work? What have we overlooked? Do we need to spend more time brainstorming or investigating?”) 4 Show respect to the speaker

No cell phones will be on during board meetings. One person speaks at a time. No side conversations — they are rude to the speaker and distracting to other listeners. Directors behave in a polite and respectful manner with colleagues and towards management. Avoid being a disruptive meeting participant. However, when a person is disruptive (eg dominating, interrupting, starting side conversations), all directors share responsibility for dealing with the disruption. If you cannot deal with it, call on the chair to do so. If the chair cannot deal with it, get a chair who can. Do not take calls or send texts during the meeting, unless it is a break time. Everyone physically present should keep their attention on the meeting, not on business outside the meeting. 5 Start on time and end on time Show respect to those people who arrive on time by starting on time. Show respect for everyone by recognising that they have every right to make commitments after the agreed meeting end time (not before or during). Do not make plans that require you to leave the meeting before its scheduled close time. 6 Do what you say you will do The board needs to hold each director accountable for following through on agreed actions. Management is watching and noting the standards (high or low) of performance of the board. Follow through on action plans. For example, do not approve the Minutes and then, when an action item for which you are responsible is raised, claim that the Minute is wrong. 7 Attack the problem, not the people Criticise ideas, not people.

The chair will terminate discussions if information is not available to pursue the discussion or if members are unable to behave in a respectful manner. 8 Follow the decision-making procedures The board will use the management and board report format as outlined in the Decision-making Policy. All discussions (and board proposals and reports submitted to the board) will: (1)

state succinctly and explicitly what the problem/issue is (definition)

(2)

state/agree what the criteria for a good solution/decision are in this instance

(3)

state/agree what the options are (ie all options including status quo/doing nothing)

(4)

state/agree how each option meets or does not meet the criteria in Step 2, and

(5)

make a recommendation to the board defining exactly what action is called for (optional).

Directors will endeavour to achieve closure of each step of the decision-making process before moving on to the next step. 9 Preparing for the meeting At board meetings, the secretary’s role is Minute taking and providing governance advice. The secretary’s tasks include: •

preparing the Agenda and all supporting documents and emailing these one week prior to the scheduled meeting

•

drafting the Minutes of the meeting and updating the action items and sending these out within five business days of the meeting, and

•

receiving all correspondence for the board and notifying the board in a weekly email with separate emails for

board resolutions (if no issues arise requiring an email, none shall be sent). At board meetings, the chief executive officer’s role is to: •

provide the board with high-quality, timely and relevant information on issues of strategic importance

•

demonstrate clear ownership of decisions made by the board, and

•

report progress against all set objectives.

10 Replacing the chair The chair has an important role. Not everyone can do it well. If you have tried speaking to the chair and explaining clearly that his or her chairing skills are not appropriate for the board, then you must take action and replace the chair. As a meeting cannot be carried out without a chair, the proper procedure for changing the chair between designated chair election or appointment times is for a director to propose: “I nominate [name of director] to be the chair.” As soon as this motion is on the floor, the chair shall immediately step down and allow the deputy chair or another board member to chair this session. The meeting cannot be adjourned or closed until this motion is voted on. If a new chair is approved, he or she remains chair until the next scheduled chair elections or until another motion to replace the chair is approved. A simple majority passes the motion with the result that a new chair is elected and the meeting has not been without a chair. Be sure this item and motion are on the Agenda for the meeting or deficiency of Notice will be a valid reason for invalidating any resolutions.

¶1006 Chairing the meeting

Because collective decision making involves more than simply obtaining a majority of votes for the same option, it requires skilled facilitation of the decision-making process to ensure that: • the task of gathering and analysing the information and options is robustly carried out, and • the board members feel satisfied about the decision and, just as importantly, about the decision-making process they used. The decision-making process should do no harm to the relationships between board members and should make them willing to work together again in the future. Chair facilitates decision-making process The chair is responsible for facilitating the decision-making process and for helping members to make effective collective decisions. However, direct attempts by the chair to influence and direct the board (ie “capture” the board) are symptomatic of ineffective, dysfunctional leadership. Unlike the leaders of other teams and groups, the chair of the board has no greater authority or power than any other member of the board. This must be respected or the board becomes a puppet of the chair. This puppetry is referred to as chair capture of the board. The chair should be the facilitator of the process, not the chief influencer. Boards whose chairs use a directive leadership style generate and discuss fewer solutions, seek fewer outside sources of information and use less information before making decisions than boards that have participative chairs. Boards with a directive leader are more likely to adopt the chair’s preferred solution, especially if the chair expresses a preference early in the discussion. Participative chairs, on the other hand, are more likely to encourage the divulging and sharing of information. They also tend to be more skilled at controlling and resolving conflict, can often divert disagreement into constructive discussion, and give less vociferous members a chance to be heard when more aggressive board members dominate discussion.

Chair uses agreed decision-making procedures The chair can use formal decision-making procedures to help facilitate good board process (see ¶1004). Make sure that everyone focuses on the same issue at the same time, and acknowledge contributions even if they are not relevant to current discussion and record them for later consideration (eg by noting them on a flip chart or whiteboard to ensure that they are addressed when appropriate). The chair serves the board best by keeping the board members’ attention focused on the particular step of the problem being discussed, identification of the issue, the criteria for selecting an ideal solution, the options available, their advantages and disadvantages and, finally, selection of the best solution. The most effective chairs are those who can act as devil’s advocates by raising issues in a conventional, low-key style with questions such as: “Haven’t we perhaps overlooked the negative consequences of failing to …?” or “Shouldn’t we give more thought to some of the unexplored alternatives?” Chair counteracts harmful influences By raising questions in a non-aggressive manner and without expressing personal views, the chair helps the board avoid faulty information processing, faulty assumptions, faulty evaluation of alternatives, and the undue influence of particular group members. It is the explicit duty of the board of directors to rise above self-interest and to focus its efforts towards attaining the greatest good for the entity it is governing. However, all too often, directors are motivated by personal, social or political influences that may adversely affect the board’s decision-making performance. If this is the case, one or more of the board members (preferably including the chair) must be able to recognise the signs of unwanted influences and be capable of taking steps to counteract the potential harm. Countering the harmful influence of personal, social or political influence requires strong communication and facilitation skills on the part of the chair. If the chair does not possess all the skills required for effective board facilitation, he or she should identify and encourage other board members with those skills to intervene as appropriate.

Chair facilitates consensus but not through conformity Beware of boards that brag about their consensus record! Accepting and welcoming disagreement is far healthier than pressuring dissenters into conformity. On the other hand, boards that sincerely strive to answer all board members’ questions in order to achieve consensus without pressuring non-conformists deserve to brag about their culture and record. This is rare but worth striving for. Good chairing involves identifying and addressing detrimental behaviours such as: • conformity imposed by suppression of conflict and creativity • dominance by a few and bullying of dissenters • withdrawal and non-participation • uncommitted compliance, and • other self-effacing and self-protecting behaviours. Remember that silence counts as consent — but bullying or intimidating to get consent is bad governance. Key responsibilities of good chair The chair should not have the solutions, but should be responsible for ensuring that an effective board decision-making process is followed. The chair needs Meeting Rules and decision-making procedures to guide fulfilment of his or her duties. A Position Description outlining the duties and expectations of the chair should be used as the basis for evaluating the chair’s performance (see the Duties of the Chair template at Figure 10.6).

¶1007 Use and purpose of committees Faced with large amounts of information, a board may spend too

much time organising that information instead of solving problems. Properly constituted and run board committees relieve the board of organising and analysing the data by documenting the organisation and analysis. Armed with this analysis and using decision-making procedures (see ¶1004), the board can then consider problems efficiently. Decision making is not delegated to committees. Their role is to define the issues, generate possible solutions, use board criteria to evaluate potential solutions, make recommendations and provide a full report of this to the board, so the board can make quicker decisions than if the full board had to do all this work in the board meeting. The purpose of committees is to improve efficient decision making by the board, not to remove any board responsibility or authority. The committee members have done their job if the board works through their report step by step and has few or no additions to make. The committee’s task is easier if the board has pre-approved the criteria for a good solution and the priority of those criteria. Board committee reports should follow the prescribed decision-making report format (see ¶1004). Board committees will only speak or act for the board when authorised to do so. The authority conferred on a board committee must not undermine the authority delegated to the chief executive officer (CEO). Board committees do work for the board, not for management. If a committee is needed to assist management, it should be led by management and report to management, not to the board. Standing or ad hoc committees Committees may be “standing” or “ad hoc”. Ad hoc committees are formed for a specific project that has a definitive completion date (eg a school board’s centenary committee set up to plan the school’s centenary celebrations, or a rules committee established to review and recommend changes to a society’s rules). Most small and medium-sized enterprises (SMEs) typically have standing committees such as:

• the finance and audit committee • the health and safety committee (see [¶509]) • the human resources committee, and • the governance committee. The finance and audit committee and the human resources committee focus on legal compliance and strategies for the organisation as a whole. The governance committee focuses on supporting and defining good governance policies and procedures. In smaller organisations, the human resources and governance committees are often combined (see Figure 1.5). Every committee should start with a specific documented Terms of Reference (TOR). Without a TOR, committees may overstep their authority, fail to address all their responsibilities or continue their existence beyond their usefulness. A committee’s TOR, much like a Board Charter does for a board, specifies the committee’s objectives, responsibilities, membership, authority, reporting, and procedural guidelines. Each of these terms is important to guide the committee members and ensure all parties understand the remit of the committee. The TOR may also serve as criteria for the annual review of the committee’s performance by the board. See Figure 10.7 for an example of the TOR for a board’s standing committee on human resources.

¶1008 Governance policies — the architecture of the board Just as an organisation requires policies to set expectations and guide those involved, so does a board. Governance policies outline how the board should operate, specify who is responsible for implementing the duties listed in the policies, establish accountabilities, and ideally provide reasons and background that can help those responsible for implementation and

evaluation of board performance. In small organisations, many of these policies are combined into one or more policies because they do not need as much detail as larger entities. The following governance policies are common: • Board Charter (see Figure 1.4 at ¶118) • Delegations of Authority (see Figure 10.8) • Board Code of Conduct (see Figure 10.9) • Board Expenses Policy (see Figure 10.10) • Terms of Reference for each standing committee (eg finance and audit, governance, human resources, remuneration and risk) (see Figure 10.7) • Terms of Reference for any ad hoc committees (see Figure 10.7) • Meeting Rules (see Figure 10.4) • Duties of the Chair (see Figure 10.6) • Directors’ Duties (see Figure 10.11) • Director Induction (see Figure 10.12) • Board and Director Evaluation (see chapter 15) • Protected Disclosures Policy and Procedures (see Figure 10.13) • Board Annual Work Plan (see Figure 1.6 at ¶120), and • Disclosure of Governance Practices (see Figure 1.5 at ¶119).

¶1009 Resolutions Register

A Resolutions Register is a register of all resolutions (all decisions except approval of the financial statements and approval of the Minutes are policy decisions) made by the board, organised by topic to enable quick reference to all previous decisions on that same topic or related topics. The most recent decision (as evidenced by the date which follows each policy) is listed first followed by all previous decisions in descending date order.

Figure 10.5: Resolutions Register Example ABC Company Resolutions Register Notes: •

This register contains resolutions as at 16 November 2015.

•

All resolutions in the register have been ratified since March 2013.

•

This register excludes approvals of Minutes and financials. The following meetings had no resolutions beyond Minutes and financials: —

10 November 2013

—

11 August 2013

—

13 October 2013

Accounts, Banking and Finances Resolved that ABC Company will change banks from ABC Bank to Better Online Bank; authorised account signatories shall be as per Delegations of Authority. (180815) Agreed that all bank accounts should be on the balance sheet. (210915) Board

Resolved that Sarah Soho and Abigail Von Huff are invited and, if accepting, are appointed to fill board vacancies effective immediately and until new directors can be elected. (190515) Code of Conduct Agreed that the ABC Company will update its Code of Conduct to cover business activities (including advertising and promotion) as part of the full marketing strategy review in June/July 2016. (210715) Constitution Resolved that the draft Constitution be revised into plain English. (251015) Interlocutory Directorships Resolved that the chair of ABC Company shall serve as a member of the subsidiary board and the chair of the subsidiary board shall serve as a director on the ABC Company board. (150615) Interests Register Agreed that all directors will submit completed Interest Disclosure Forms to the Interests Register at least annually or as their interests change. (210715) Delegations of Authority Resolved that the submitted Delegations of Authority are approved once F6.2 is added. (160315) Resolved that the submitted Delegations of Authority are approved. (1303144) Resolved that the submitted Delegations of Authority are approved. (100313) Projects and Initiatives Resolved that ABC Company commits to seeking registration of industry technicians and engineers in the most expedient

manner possible and that ABC Company seeks DOL support to co-sponsor (financial and time commitments) and that ABC Company budgets resources for this initiative in 2016. (251015) Publications Agreed that a quarterly newsletter should be sent to major sponsors starting next month. (160215) Website Resolved that the ABC Website Ltd proposal for a new website with a directory is approved. (251015)

¶1010 Other governance templates Figure 10.6: Duties of the Chair [Name of Company] Duties of the Chair Introduction For the chair of [name of company] (the company) there are a number of core functions to be performed which carry a higher degree of authority and responsibility than those of other members of the board. Procedure Responsibility for the working of the board This is the chair’s principal role and includes the tasks outlined below. Providing facilitative leadership: Providing facilitative leadership to the board, without limiting the principle of collective responsibility for board decisions. Selection of members: Actively participating in the selection of board members and ensuring, subject to board approval, that

the membership skills are properly balanced. Board succession plan: The chair should also ensure that a formal succession plan for the board is in place. Setting Agendas: Setting the Agenda for board meetings, usually in conjunction with the chief executive officer (CEO) and the secretary. This includes seeing that all relevant items are listed to be dealt with in the most effective order. The chair should ensure that the Agenda and all necessary background papers are available to board members, and that any desirable investigations and preliminary discussions are circulated in sufficient time to enable the papers to be adequately considered before the meeting. The chair may delegate these tasks to the secretary but retains responsibility for the performance. Chairing meetings: Chairing meetings of the board in such a manner that will stimulate debate on the issues before the board and encourage the most effective contribution from each member. The chair should remember the following points: •

Some members may insist on having their own way irrespective of the merits of their views and some can by habit be unnecessarily verbose on almost every subject while others, reticent by nature but having valuable views, may need to be drawn out.

•

The challenge for the chair is to facilitate discussions so that they are courteous and harmonious but always pertinent, while at the same time seeing that genuine disagreements are aired and resolved.

•

The chair should not dominate discussions but should maintain good control of proceedings. He or she should see that decisions are reached and that they are properly understood and recorded.

•

The chair needs to be fair but firm, and the interests of the company must predominate.

Conflicts of interest: At all times the chair should be mindful of

the potential for conflicts of interest and be familiar with the procedures to be followed as required by legislation, the Code of Conduct and board policies. Verifying the Minutes of meetings:s Verifying the Minutes of meetings of the board, to ensure that: •

they accurately reflect the board’s deliberations, and

•

Matters Arising from the Minutes on which further action is required have been addressed.

Board evaluations: Monitoring and evaluating the individual performance of board members as per the Board Evaluation Policy, and taking the initiative in instigating annual evaluations of the board as a whole. (See chapter ¶15 for more information about board evaluation.) Director induction: Arranging for new board members to be properly inducted. Board Annual Work Plan: Initiating, normally in conjunction with the CEO and secretary, the formulation of a work plan to ensure that the board establishes at the beginning of each year the goals it wishes to achieve and the means by which this will be carried out. Committees: Initiating the establishment of board or other committees and ensuring that they achieve their objectives. Audits: The chair shall not be part of the finance and audit committee. Relationships with board members and company secretary The chair should act as the main informal link between board members and particularly between the board and the company or board secretary. The company will run more effectively and efficiently with a good working relationship between the chair and the secretary and each will in good faith respect the other’s abilities and personal qualities.

Relationships with the CEO: The chair should recognise that the CEO is the leader of the company in all matters of management and should not expect, as of right, to become involved in the company’s day-to-day operations. It is the CEO’s responsibility to report to the board as a whole, not just to the chair. Because of their particular relationship, the chair should nevertheless: •

expect to be kept informed by the CEO of all such important matters as emerging problems, risks, potentially good or bad publicity, investment and divestment proposals, funding issues and current performance, and

•

make himself or herself available to the CEO at all times to: —

act as a sounding board and be part of the control mechanism in ensuring that the CEO’s decisions are properly considered and soundly based, and

—

give assistance and advice when needed especially on sensitive matters, and

—

ensure that the CEO understands and properly performs his or her functions impartially and in good faith.

Compliance: Because of the relationship, the chair should be in a good position to lead the board in seeing that there are adequate control mechanisms to cover compliance responsibilities and risk management generally. Relationships with the CFO: In addition to an effective working relationship with the CEO, the chair is free to discuss financial, funding and performance issues with the chief financial officer (CFO) directly. Operations: Numerous routine matters such as reviewing Minutes of meetings, formalising documents arising from board

resolutions, answering correspondence and deciding on Agenda items will require the chair’s regular attention and help ensure that he or she keeps in touch with operational matters between board meetings. Independence: The chair should ensure that he or she is sufficiently familiar with the company’s activities so as to be in a position to provide the board with independent comment on the CEO’s, CFO’s and all other senior managers’ reports. Public responses: Critical events possibly requiring urgent action (eg unintended consequences, the death or departure of a board member, media interest, physical catastrophes and unforeseen financial or other problems), although normally infrequent, can make extensive demands on the time of all board members but particularly on that of the chair. As principal representative of the board, the chair may be designated to lead the way in ensuring that such an event is managed in the best possible interests of the company and, because of his or her position, should be prepared to lead all necessary public responses, particularly on matters that are not strictly operational. Relationships with board members The chair is expected to chair meetings of the board. This role calls for special skills and personal qualities that allow and encourage members to have their say while remaining relevant to the matter at issue, and the chair must also have the capability to summarise and unify thoughts and ideas. He or she needs to be patient and understanding while at the same time assertively facilitating the meeting process. Administrative duties The chair should also have a sound knowledge of meeting procedures and be able, when required, to deal with the technical aspects of resolutions, meeting procedures, etc, and be sufficiently familiar with company law, the contents of the company’s Constitution, the Code of Conduct, Meeting Rules and governance policies to enable the handling (with assistance

from the secretary/governance adviser and legal advisers if necessary) of such matters as voting and the matters that may be properly discussed at the meeting. Reporting: During the course of the year, a number of reports and other documents may be sent to stakeholders over the chair’s signature. He or she should ensure that they are always well prepared, as, irrespective of contributions towards them from others, the chair must, in the end, accept responsibility for them. Other relationships The chair can expect to be called upon to represent the company at service organisations (eg Rotary, industry associations) and government agencies, meet major clients, suppliers and members of the community, attend company and stakeholder functions and make speeches. Media: Interviews with the media can be critical to the company’s public image and demand from the chair a sound knowledge of the company’s financial position and other aspects of the company’s affairs. Public relations: Where possible, the chair shall take advice from the public relations specialists available at the time, and shall be mandated to present a position that is consistent as far as is possible with previous media announcements. Representation of company: The chair should also be prepared to lead the presentation of the company’s cause, whether formally or informally, with politicians and others having influence on the environment in which the company operates. Compliance: While performing the functions set out above, the chair should also be expected to play a leading role in: •

the process of reviewing the company’s visions and goals

•

the company’s strategic direction and planning process

•

fostering high ethical standards and positive relationships with the company’s stakeholders, and

•

ensuring adherence by the company to both the letter and the spirit of the law.

Purpose: As leader of the board, the chair is in a unique position to set the culture of the company and to model the values by which it operates. He or she should use every endeavour to ensure that this responsibility is discharged in the best interests of the company, with a view to adding value to the company, and always working within its stated objects (purposes) and other key business drivers.

Figure 10.7: Human Resources Committee Terms of Reference [Name of Company] Human Resources Committee Terms of Reference 1 Constitution The Human Resources (HR) Committee shall be a committee of the board established by the board. 2 Objectives The objective of the committee is to assist the board in discharging its responsibilities relative to: •

managing human resources risk and compliance, with all statutory and regulatory human resources requirements

•

recommending the remuneration policy line

•

assisting the chair to conduct the chief executive officer (CEO) performance appraisal process and recommend any adjustments to the CEO’s remuneration

•

reviewing and approving development, performance and remuneration of the CEO’s direct reports and ensuring that remuneration aligns with the remuneration policy, and

•

recommending board remuneration, selection of new directors and monitoring the board profile.

3 Responsibilities The responsibilities of the committee are to: •

review the HR strategy, including remuneration policy, and annual HR plans

•

monitor compliance with statutory responsibilities relating to HR compliance requirements, for example:

•

—

Protected Disclosures Act 2000

—

Holidays Act 2003

—

Employment Relations Act 2000

—

Human Rights Act 1993

—

Health and Safety at Work Act 2015

—

Wages Protection Act 1983

—

Parental Leave and Employment Protection Act 1987

—

Parental Leave and Employment Protection (Paid Parental Leave) Amendment Act 2006

—

Privacy Act 1993

—

Volunteers Employment Protection Act 1973

—

Accident Compensation Act 2001

advise the board about outstanding areas of risk requiring management action and progress to remedy in line with scheduled compliance plan

•

review HR policies

•

review the collective agreement (CA) negotiation strategy

•

assist the chair to conduct the CEO performance appraisal, performance planning and remuneration review

•

review and approve remuneration of the CEO’s direct reports, taking into account their performance and development

•

recommend board remuneration levels, potential new directors and monitor the board skills profile, and

•

supervise special investigations when requested by the board.

In addition, the committee shall examine any other matters referred to it by the board. 4 Membership Members of the committee shall comprise members of the board appointed by the board. The number of members of the committee shall be not less than three directors. A quorum of members of the committee shall be two. The board shall appoint a chair from the members of the committee and the members of the committee shall appoint the secretary of the committee. The board secretary may be engaged to serve as committee secretary. The committee may, following consultation with the CEO, request the attendance of such members of management including the human resources manager and such other persons, including any external advisers, as the committee considers necessary to provide appropriate information and explanations. 5 Voting Committee members must vote unanimously to determine

decisions of the committee. 6 Notice of meeting Notice of each meeting shall be given to each committee member, but the non-receipt of any notice of a meeting does not affect the validity of the convening of the meeting. Unless determined otherwise by the committee or waived by a majority of members of the committee to whom notice of the particular meeting is sent, the period of notice for each meeting of the committee is at least one week. 7 Recommendations A recommendation in writing (which may consist of several documents in like form) signed by all members of the committee and containing a statement that the members of the committee are in favour of the recommendation is as valid and effectual as if it had been passed at a meeting of the committee held at the time when the written recommendation was last signed by a member of the committee. 8 Electronic meetings The committee may conduct meetings without members of the committee being in the physical presence of other members, provided that all members involved in the meeting are able simultaneously to hear each other and to participate in the discussion. 9 Frequency of meetings The chair of the committee shall call meetings as necessary, but no less than quarterly. Any member of the committee, the CEO or the external advisers may request a meeting at any time if they consider it necessary. 10 Authority The committee is authorised by the board to investigate any activity within its Terms of Reference. It is authorised to seek

any information it requires from, and to maintain direct lines of communication with, the external auditors and with the CEO. The committee is also authorised to seek information from employees of [name of company] that it considers is necessary to enable it to carry out its functions. Such requests for information by the committee should be made through the CEO. The CEO may at his or her discretion attend any meetings between the committee and employees of [name of company] unless the company’s legal advisers otherwise recommend. The committee has no authority to make any board decisions except with the express written authority of the board. The committee’s purpose is to gather the information, do the analysis and make a recommendation to the board in the same format as management uses (see management and board report format). 11 Review of the committee The committee shall undertake an annual self-review of its objectives and responsibilities and forward this to the board for consideration during the board evaluation process. 12 Reporting procedures The CEO shall be responsible for drawing to the committee’s immediate attention any material matter that relates to the human resources of [name of company], any substantive breakdown in relationships or process, and any employee or other complaints of harassment, waste, fraud or harm. After each committee meeting, the chair shall report the committee’s findings and recommendations to the board. The Minutes of all committee meetings shall be circulated to the board, the CEO (when appropriate) and to such other persons as the board directs. 13 Delegated authorities The committee will be responsible for ensuring that the

delegated authorities agreed by the board are being followed insofar as they relate to human resources matters. Note: Like all committee Terms of Reference, this should be customised to reflect the entity’s language and structure, and should be updated annually as legislation and the entity’s policies change.

Figure 10.8: Delegations of Authority Example [Name of Company] Delegations of Authority: March 2016 Service Contracts

Levels of Authority Board CEO Admin Marketing/Training Mgr Mgrs

S1

Approve creation of service proposal before distribution to any party outside board

X

S2

Negotiate all service contracts

X

S3

Approve signing of any contract

S4

File all contract

X

X

compliance reports S5

Review service contract delivery annually

S6

Terminate or exit service contract

X

X

Legal

Levels of Authority Board CEO Admin Marketing/Training Mgr Mgrs

L1

Seek advice, etc, from solicitors or any other legal adviser for any potentially litigious matters

X

L2

Seek advice, etc, from solicitors or any other legal advisers for any nonlitigious matters

X

L3

Sign service

X

contracts and deeds on behalf of the board L4

Sign all other legally binding documents on behalf of the board other than service contracts and deeds General Administration

X

Levels of Authority Board CEO Admin Marketing/Training Mgr Mgrs

G1

Approve joint venture or partnership arrangements

X

G2

Release information to the media on any matter concerning board or a consumer of the board

X

Research and Publications

R1

Approve all research projects

Levels of Authority Board CEO Admin Marketing/Training Mgr Mgrs X

R2

Approve [name of company] journal content

X

R3

Approve newsletter content

X

R4

Approve all other publications content

X

Finance and Capital

X

Levels of Authority Board CEO Admin Marketing/Training Mgr Mgrs

F1

Capital Expenditure

F1.1 Budget approval F1.2 Expenditure approval

F2

Establishment Expenditure

X X

F2.1 Budget approval

X

F2.2 Expenditure approval

F3

X

Operational Expenditure

F3.1 Approve budgets

X

F3.2 Commit expenditure outside approved budget

X

F3.3 Approve contract budgets

X

F3.4 Commit expenditure inside approved budget

X

F4

X

Debtors

F4.1 Raise a credit note

X

F4.2 Raise an invoice

X

F4.3 Initiate litigation for debt recovery

X

X

F4.4 Alter provision for doubtful debts

X

F4.5 Write off bad debts

X

F5

Borrowing

F5.1 Approve new arrangements

X

F5.2 Borrow within authorised arrangements

X

F6

Banking

F6.1 Administer electronic banking

X

F6.2 Administer term deposits and bank accounts

X

X

Figure 10.9: Board Code of Conduct [Name of Company] Board Code of Conduct 1 Mission and Values The board and individual directors have an important role in communicating the organisation’s vision and upholding and modelling its values. The mission statement is:

[insert mission statement] The values of the company are: [insert values with descriptions] These values provide the foundation for the way the organisation functions and behaves, both in its internal workings and in the way it treats and deals with others. 2 Code of Conduct All directors of the [name of company] board are bound by this Code of Conduct. The Code sets out key principles that govern the conduct of board members, both individually and collectively. In developing the Code, directors recognise the unique nature of [name of company], which embraces the disciplines and accountabilities expected of a corporate board of directors. The principles in the Code endeavour to address potential differences in attitudes and behaviours of board members. The board is ultimately accountable for the successful performance of [name of company], and the actions of directors should support the activities of the organisation. Fiduciary Responsibility Each director has the duty to ensure that the company is properly governed. To meet this obligation, directors are expected to: •

act in good faith

•

act with honesty and candour toward each other at all times

•

maintain their competence and not hold themselves out to be experts in areas outside their competence

•

treat all directors, employees, shareholders, suppliers and stakeholders fairly

•

exercise reasonable care, diligence and skill at all times

in carrying out their duties, and •

lay aside all private and personal interests in their collective decision making and put the company’s interests above their own at all times.

Accountability Directors are accountable to the board as a whole for the performance of the company. The board is accountable to shareholders and, to a lesser degree, stakeholders. The board holds itself accountable by holding an annual meeting inviting shareholders and explaining the board’s policies, actions and expenditures of the past year. The board is transparent about the Interests Register and declares any interested transactions and justifies the necessity in light of their fiduciary responsibility to the company. Commitment In accepting their positions, directors have made a commitment to undertake the work of the board, and to commit the time required to acquit these responsibilities. Directors are expected to make every effort to attend scheduled meetings, but recognise that there will be occasional conflicts, which require the courtesy of advanced notice. Directors undertake to be diligent in preparing for and attending board meetings. They will endeavour to be as informed and as knowledgeable as possible about the responsibilities of the company, the industry environment and the issues they are confronted with in order to arrive at the best decisions possible. Training Directors are required to be familiar with the obligations and duties of a company director and are expected to avail themselves of opportunities for training and professional development. Directors have an obligation to assist the board secretariat to

maintain an up-to-date record of their training and development. Collective Responsibility Directors recognise that there may at times be tension between the concepts of collective accountability of a board and individual accountability to the shareholders and other stakeholders. Directors agree to support and abide by the following principles: •

Directors may clearly express their individual views at board meetings. However, they must always vote with the company’s interests as their primary concern. Directors accept that once the board has formally reached a decision, this decision becomes the policy of the board.

•

It is inappropriate for a director to undermine a decision of the board once made or to engage in any action or public debate which might frustrate its implementation.

•

Individual directors will not attempt to re-litigate previous decisions at subsequent meetings of the board, unless the majority of trustees agree to reopen the debate.

•

Directors’ personal actions should not bring the board into disrepute or cause a loss of confidence in the activities and decisions of the board.

Public Statements The chair should make all statements on behalf of the board and/or relating to the board or company policy. Either the board chair or the chief executive officer (CEO) (or other senior staff as per documented Delegations of Authority) speaks on operational matters. On occasions, directors may be asked their opinions and, when talking to the media, directors should: •

make clear the capacity in which they are speaking

•

make it clear that they are expressing their own personal views and not speaking for the board

•

not make any promises

•

be aware of the governance role, and that management is responsible for policy implementation and operational issues, and

•

whenever possible, let the board chair know in advance if they are contacted by or intend to speak to the media.

Clarity about Roles The board is responsible for the governance of the company, and delegates to the CEO responsibility for implementing the decisions of the board and the day-to-day management of the organisation. The CEO is expected to provide the board with relevant and appropriate information and with free and frank advice to help it reach high-quality decisions on strategy, policy and other governance matters. Directors recognise that, for the purposes of accountability, clarity between the roles of governance and management is essential. Directors must take care to avoid becoming involved in management’s activities. Directors will not make commitments for work or expenditure by the company that have not been previously approved by the board, nor create any obligation or liability for the company beyond authorised delegations. Employment Relationship The board employs the CEO, who is responsible for the employment and management of all other staff in the organisation. Directors will: •

Be supportive of employees of the company and will not criticise employees or the products/services provided by the company in public. Any concerns relating to staff will be raised with the board chair and/or CEO, as appropriate.

•

Exercise judgment and courtesy in respecting the

protocol of communicating through the chair and/or CEO (as appropriate) in raising matters with the CEO and/or senior staff. •

Not attempt to unduly influence any employee of the company to present material in a particular way that might affect the outcome of a decision to be made by the board.

•

Exercise care in communicating privately with employees of the company, and refer any staff with complaints or concerns back to the CEO or to the Protected Disclosures Scheme.

Contact with Individual Staff In some circumstances, it will be appropriate for directors to communicate directly with individual staff to further their knowledge/understanding of organisational issues relevant to their governance role. Such communication needs to be carried out in an open and considerate manner. As a general rule, requests to individual staff should be governed by the following protocols: •

In the first instance, such approaches should be made “through the management line”, either via or with the knowledge of the CEO (and chair) and subsequently through the appropriate management levels (ie top down).

•

Emails (or other written requests) and subsequent communication should be copied to the CEO and chair.

•

Consideration should be given to staff pressures and workloads, and requests should not impose unreasonable burdens on staff.

•

Any concerns about responsiveness to director requests should be taken up directly with the chair/CEO.

Complaints Procedures and Representations

Board members have an important role in providing a public relations voice to the activities of the company. However, directors recognise that the organisation, through the mandate of the board, has processes in place to respond to consumer complaints and other concerns. Directors will advise customers/clients, employees and suppliers who desire personal matters to be brought to the attention of the board to follow the proper procedures for raising issues and registering complaints. Directors will not advocate on behalf of an individual beyond advising them of the complaints procedures and checking that the matter has been addressed satisfactorily by the organisation. (Note that “satisfactorily” refers to the procedures followed by the organisation in addressing the matter and does not necessarily mean that the matter must be resolved as the individual would wish.) However, these procedures for raising issues and registering complaints do not preclude directors from pursuing in a general way issues relating to policy or systemic failure that may have been indicated by or arise from an individual situation or complaint. Confidentiality Directors receive information that is both public and private and must recognise that the release of information, and access to and handling of personal information about any individual, is governed by the Official Information Act 1982 and the Privacy Act 1993. In order to protect the organisation from inappropriate use of information: •

Directors are expected to be familiar with this legislation and to refer any requests for “official information” to the CEO.

•

Directors accept that they may acquire information of a confidential nature (eg about the company, its suppliers,

employees, competitors and other parties) and agree not to use any such information for personal advantage, nor to disclose it to any other person unless first authorised by the board. Conflict of Interest A board member who is “interested in a transaction” of the company must, as soon as practicable, disclose the nature of the interest to the board. The director must not take part in any deliberation or decision of the board relating to the transaction. The disclosure must be recorded in the Minutes and entered in a separate Interests Register. Under s 139(1) of the Companies Act 1993, a director is “interested in a transaction” if he or she: (a)

is a party to, or will or may derive a material financial benefit from, the transaction; or

(b)

has a material financial interest in another party to the transaction; or

(c)

is a director, officer, or trustee of another party to, or person who will or may derive a material financial benefit from, the transaction …; or

(d)

is the parent, child, spouse, civil union partner, or de facto partner of another party to, or person who will or may derive a material financial benefit from, the transaction; or

(e)

is otherwise directly or indirectly materially interested in the transaction.

Directors must: •

Recognise that, at times, there may arise a “perception of interest”, which is a wider interpretation than that defined above. A “perception of interest” exists where any director is “perceived to have an interest greater than the general public”. The best course, when there is any

doubt, is to raise such matters of interest in the first instance with the chair, who will determine an appropriate course of action. •

Recognise that, where an interest is declared (or where it is considered that there is a clear “perception of interest”), the normal practice is for the director concerned to leave the room. The board can, however, exercise its discretion in allowing the director to remain. In such circumstances, the director would not participate in any decision.

•

Not use their official positions for personal gain, or solicit or accept gifts, rewards or benefits that might be perceived as inducements and that could compromise the board’s integrity.

•

Exercise care and judgment in accepting any gifts, meals, entertainment or other personal gifts, and advise the chair and/or board of any offer received.

Directors Undertaking Work for the Company Note: In many countries and organisations with high governance and ethical standards, non-executive directors/trustees are forbidden from working for the organisation because of conflicts of interest. This practice is allowed under New Zealand’s laws but higher standards than the law may be adopted. Directors should be aware that undertaking paid work for the company other than in the director’s role needs to be handled very carefully and with complete transparency. Such situations should be guided by the following principles/processes: •

The chair should be given early notification of any situations where a director might engage in work for the company.

•

Directors should not receive remuneration for undertaking work which is considered part of their role/duties and responsibilities as directors.

•

Directors should only be engaged to undertake other work or assignments for the company on the basis of their particular qualifications, skills and suitability for the work, and any such engagement should follow the normal employment/contracting processes for such work within the company.

•

Directors should not in any way use their position as board members to influence their selection/engagement for work with the company.

•

Any such engagements should be declared to the board and recorded in the Interests Register.

Requests for Items to be Placed on Board or Committee Agendas Requests by directors for items to be placed on Agendas should be made to the board chair or the chair of the appropriate committee. The board chair or committee chair will make a decision following discussion with the CEO or other relevant senior manager, and will arrange for an accompanying paper providing management comments/recommendations as appropriate. The decision will be confirmed by email to all board members — with reasons if declined and suggesting a different way of progressing the matter. Behaviour at Board and Committee Meetings Board members agree to abide by the Meeting Rules and protocols documented in other governance policies.

Figure 10.10: Board Expenses Policy [Name of Company] Board Expenses Policy 1.

All actual and reasonable expenses incurred by board

members in necessary and direct fulfilment of their duties and obligations shall be reimbursed, provided prior approval from the chair in conjunction with the chief executive officer (CEO) has been obtained. Prior approval should be minuted at the time the decision is made for the director to act on behalf of the company. 2.

In the case of the chair, approval is granted by the CEO in conjunction with the deputy chair.

3.

Receipts are required for all expense claims.

4.

Reimbursement for private motor vehicle use will be at the Inland Revenue stipulated rate.

5.

No allowances are paid to any director, employee or other agent of [name of company], as this encourages profiteering off the organisation. Directors are paid a fee for their contribution to the organisation and reimbursement of actual and reasonable expenses ensures they are not out of pocket when required to travel on company business.

Figure 10.11: Directors’ Duties [Name of Company] Directors’ Duties Fiduciary Duties In addition to those duties for directors stated in the Board Charter, Code of Conduct and other board/governance policies of this company, for which every director shall be held accountable, under common law, duties of directors also require them to: •

act honestly

•

exercise reasonable care and skill

•

act diligently (accurate and timely performance of duties), and

•

be aware of and understand their fiduciary duties, which are to: —

act in good faith and in the interests of [name of company] as a whole

—

exercise the powers for the purposes for which they were conferred

—

not fetter the future exercise of directors’ powers, and

—

avoid any conflicts of interest.

Liability The courts recognise that running a business enterprise inevitably involves an element of risk-taking. A director will be liable when he or she: •

remains passive

•

fails to monitor the business and management of [name of company], or

•

acts recklessly and not in the best interests of [name of company] (eg by incurring a liability when the director knows [name of company] will not subsequently be able to repay its debts as they fall due).

Access to Information There is no part of [name of company]’s affairs that a director should not be entitled to know about. Every director has the right to ask that any item relevant to [name of company] be included in the Agenda and be aired among members of the board unless it breaches the Privacy Act 1993 or other legislation. Whenever possible, sufficient notice of the items should be given to the chair in advance to enable normal preparatory work on them to be undertaken. Director Commitment Board members who fail to regularly attend meetings, provide reports or assignments on time, fail to hold agreed committee or other meetings to progress tasks and other acts of nonperformance will have their appointment terminated unless a three-quarter majority of the board (excluding the member in question) votes to retain them. A board member is expected to attend all scheduled board meetings and when a committee member, he or she should attend scheduled committee meetings. Other work commitments and social commitments are not acceptable excuses for missing board or committee meetings. A meeting attendance chart shall be kept by the secretary for board meetings. Scheduled committee meetings will also be reflected on the chart. Board member assignments and actions shall be recorded with assigned date, due date and actual completion date in the Minutes. Committees will provide Minutes of their meetings to the secretary for attachment to the board Minutes. These are to be provided prior to the board meeting but following the committee

meeting. Absence from more than two (2) meetings within 12 months is unacceptable. Partial attendance is also unacceptable. All cell phones must be turned off or to silent during meetings and calls should not be taken except for family emergencies. Board members are expected to have thoroughly read all board papers in advance of meetings and to have completed all assigned tasks on time and in full.

Figure 10.12: Director Induction [Name of Company] Director Induction Provide new directors with the following documents and information. Discuss and explain each one. 1.

Strategy and Strategy Monitoring Report (Balanced Scorecard)

2.

Constitution

3.

Company policies and guidelines

4.

Financials (copy of previous year’s end-of-year financial report and monthly financials for past three months)

5.

Banking signatories (forms to be signed, photo id scanned and signed with home address)

6.

Budget

7.

Duties of the chair and other role descriptions

8.

Board meetings (schedule, Meeting Rules and procedures)

9.

Board commitment (attendance policy, communication with other directors and termination policy and procedures)

10.

Resolutions Register

11.

Delegations of Authority

12.

Disclosure of Governance Practices

13.

Board Annual Work Plan

14.

Terms of Reference for committees

15.

Stakeholders list and description (and who manages the relationship)

16.

Interests Register (and individual Declaration of Interest Form)

17.

Board Evaluation and reporting

18.

Governance Audit (including copy of last report and Plan to Remedy)

Figure 10.13: Protected Disclosures Policy and Procedures [Name of Company] Protected Disclosure Introduction 1.

The purpose of this Protected Disclosures Policy (the Policy) is to set out information and guidance from the board of directors (the board) of [name of company] (the company) for company employees, consultants and suppliers who wish to report a serious wrongdoing within the company.

2.

This Policy was approved and adopted by the board at its

meeting held on [date of meeting] and is binding on the board, the chief executive officer (CEO) and all employees, suppliers and consultants. This Policy is issued by the board in compliance with the Protected Disclosures Act 2000 (the Act). 3.

Copies of this Policy shall be included in the board’s Policy Manual and [details of where else copies held, eg copies held in every manager’s office and the company staffroom].

What is a protected 4.

A protected disclosure is a statement made by a company employee where they believe a serious wrongdoing has occurred. Employees who make disclosures will be protected against retaliatory or disciplinary action and will not be liable for civil or criminal proceedings related to the disclosure.

Who can make a disclosure? 5.

An employee of the company can make a protected disclosure. For the purposes of the Act and Policy only, an employee shall be defined as including all employees, current and former, permanent, casual or fixed-term, suppliers, contractors and volunteer workers, permanent or temporary, and persons concerned with the management of the company.

What is a serious wrongdoing? 6.

A serious wrongdoing includes any of the following acts: •

an unlawful, corrupt or irregular use of company financial and/or physical resources

•

an act, omission or course of conduct that constitutes a serious risk to public health or public safety or the environment

•

an act, omission or course of conduct that

constitutes a serious risk to the maintenance of law, including the prevention, investigation and detection of offences and the right to fair trial •

an act, omission or course of conduct that constitutes an offence, or

•

an act, omission or course of conduct by a company employee which is oppressive, improperly discriminatory or grossly negligent or constitutes gross mismanagement.

Conditions for disclosure 7.

8.

Before making a disclosure, the employee should be sure that: •

the information is about a serious wrongdoing in or by the company

•

he or she believes on reasonable grounds the information is true or is likely to be true

•

he or she wishes to disclose the information so that the serious wrongdoing can be investigated, and

•

he or she wishes the disclosure to be protected.

Any disclosure made in accordance with clause 6 is a protected disclosure for the purposes of the Act as long as it is made in accordance with the procedures set out below.

How to submit a protected disclosure 9.

The employee should submit the disclosure using the suggested Protected Disclosure Statement attached as an Appendix. The disclosure should contain the following information: •

the nature of the serious wrongdoing

•

the names of the parties involved, and

•

the surrounding facts, including details as to the time and/or place of the wrongdoing if known or relevant.

Where to send the Protected Disclosure Statement 10.

The Protected Disclosure Statement must be sent to: •

either the board secretary who has been approved by the board to receive Protected Disclosure Statements

•

or the board chair if the employee believes on reasonable grounds that the board secretary is or may be involved in the wrongdoing or is associated with a person who is or may be involved in the wrongdoing.

Investigation 11.

Within five working days of receipt of a Protected Disclosure Statement, the board secretary must refer the protected disclosure to the company investigator. The company investigator, appointed by the board, must, within 20 working days of the date of receipt of the Protected Disclosure Statement by the board secretary, examine the allegations of wrongdoing and decide whether a full investigation is required.

12.

If the company investigator considers a full investigation is required, the investigation will be undertaken by the company investigator in consultation with the board chair and/or board deputy chair as quickly as practically possible, through an appropriate authority.

13.

At the conclusion of the investigation, the company investigator will prepare a report of the investigation with recommendations for action if appropriate which will be sent to the board chair and deputy chair. The board chair

and board deputy chair will then decide on an appropriate course of action. Confidentiality 14.

Employees’ protected disclosures will be treated in the utmost confidence. During the investigation and reporting, the board secretary, board chair, board deputy chair and company investigator will use their best endeavours not to disclose information that may identify the employee who made the disclosure, unless the employee consents in writing to the disclosure or the company investigator reasonably believes disclosure of identifying information is essential: •

to ensure an effective investigation

•

to prevent serious risk to public health or public safety or the environment, or

•

to have regard to the principles of natural justice.

Protection of employees making disclosures 15.

16.

An employee who makes a protected disclosure and who has acted in accordance with the procedure outlined in this Policy: •

may bring a personal grievance in respect of retaliatory action from their employer

•

may access the anti-discrimination provisions of the Human Rights Act 1993 in respect of retaliatory action from their employers, and

•

is not liable for any civil or criminal proceedings, or to a disciplinary hearing by reason of having made or referred to a disclosure.

The above protections provided in the Act will not be available to employees making allegations they know to be false or where they have acted in bad faith.

Disclosure to an appropriate authority in certain circumstances 17.

18.

A disclosure may be made to an appropriate authority if the employee making the disclosure has reasonable grounds to believe that: •

the board chair is or may be involved in the serious wrongdoing alleged in the Protected Disclosure Statement

•

immediate reference to an appropriate authority is justified by urgency or exceptional circumstances, or

•

there has been no action or recommended action within 20 working days of the date of the Protected Disclosure Statement.

Appropriate authorities include, but are not limited to: •

the Commissioner of Police

•

the Director of the Serious Fraud Office

•

the Parliamentary Commissioner of the Environment, and

•

the Health and Disability Commissioner

but do not include a Minister of the Crown and a Member of Parliament. Appendix Suggested Protected To:

Board secretary [Name of company] [Postal address of company]

From:

[Name of employee]

Protected Disclosure Statement I make the following disclosure in accordance with the Protected Disclosures Act 2000. I wish the disclosure to be protected. The disclosure is about serious wrongdoing in or by the company. I believe on reasonable grounds that the information contained herein is true or likely to be true. I wish to disclose the information so that the serious wrongdoing can be investigated. I consent to the disclosure of my identity to those who may be involved in the investigation of the alleged serious wrongdoing, being the board chair, the deputy board chair and the company investigator. I consent/do not consent to the disclosure of my identity to third parties other than those mentioned above. Disclosure: [see clause 9 of the Policy for the details required] Signed by: [Signature] Date: Comments 1.

Employees are recommended to mark the envelope Confidential and to advise the board secretary by phone or email that they will be sending a Protected Disclosure Statement to him or her.

2.

The board secretary will acknowledge by letter the receipt of the company employee’s Protected Disclosure Statement.

3.

The board secretary will pass the statement to the

company investigator for action as set out in clause 10 of the Protected Disclosures Policy.

Chapter 11: ORGANISATIONAL RISK MANAGEMENT Editorial information

Clive Smallman

¶1101 Introduction Working with an organisation’s management, one of the key responsibilities of any board (of any size of organisation) is the establishment, maintenance and operation of a system for managing organisational risk. This system must cover all the activities of an organisation.

¶1102 What is risk management? One of the most difficult aspects of risk management is confusion over what it actually means. This confusion stems from a misunderstanding of two phenomena. Risk management in organisations more accurately refers to the management of potential organisational hazards and the risk that those hazards may eventuate, leading to organisational issues. Organisational hazards Organisational hazards fall into one of six categories:1

• Sector hazards are specific to the sector, industry or market in which the organisation operates. If the organisation produces agricultural equipment, its sector hazards would be those specific to the agricultural sector and the market for agricultural equipment (eg if a firm produces milking machinery, it faces a hazard of a glut in dairy production). • Market hazards are potential losses arising from adverse movements in market prices or market rates. They may present in the form of interest rates, equity prices, exchange rates or commodity prices. The recent global financial crisis is a remarkable illustration of what happens when these hazards and their associated risks are not properly managed. • Credit hazards are potential losses from the failure of a creditor to make a promised payment. • Liquidity hazards are associated with either potential cash flow problems or with the potential cost or inconvenience of unwinding some form of investment. • Operational hazards lie in the potential failure of internal systems or the people who operate them. These hazards may vary from the minor (eg office equipment breakdowns) to the major (eg failure of management controls leading to bankruptcy, as occurred in major banks worldwide from 2008). • Legal hazards arise from the prospect that contracts might not be enforced where a party to the contract defaults. Risk Risk is the product of an individual’s assessment of the likelihood of a hazard eventuating and the assessment of the impact of that risk. Risk may be, and often is, expressed as a probability, but this approach again typically leads to problems around communication, summed up by the late Richard Feynman (a highly celebrated American physicist who sat on the presidential commission that investigated the

Challenger space shuttle disaster): “If a guy tells me the probability of failure is 1 × 105 [one in a million] I know he’s full of crap.”2 And this is the problem with risk — it is always prone to an element of subjective judgment. There are far simpler ways of “calculating” risks associated with most hazards than complex probability distributions (see ¶1104). Organisational issues Once a hazard eventuates (ie a risk-laden event occurs), it becomes an issue requiring a differing set of management skills from those employed before the event occurred. Put more simply, a risk is a potential opportunity or threat to the organisation; an issue is a problem that the organisation has now. Balancing risk and reward Overwhelmingly for lay people, risk management tends to have negative connotations, but in business organisations, in particular, good risk management is central to assuring a balance between risks and reward. If there is too little control over exposure to hazards and their associated risks, chaos inevitably ensues. However, excessive controls can limit the return on investments made and bureaucracy stifles enterprise. Art of risk management The art of risk management is to understand the shareholders’ or stakeholders’ appetite for risk and control exposures accordingly.

Footnotes 1

K Dowd Beyond Value at Risk: The New Science of Risk Management (John Wiley & Sons, Chichester, 1998).

2

RP Feynman What Do You Care What Other People Think? (HarperCollins, London, 1993) at 216.

¶1103 Risk management strategy Risk management writers and advisers often write or speak of the need to “introduce a risk management culture”. This is a strange requirement, since culture generally flows from strategy, and strategy is squarely in the domain of the directors of any organisation. See chapter 13 for more information on business strategy. When developing an organisation’s strategic plan, the directors must consider the shareholders’ or stakeholders’ appetite for risk, and document this in a risk management policy. This does not have to be a “grand” statement, but expectations should be made clear around the major hazard groups and, if necessary, specific hazards.

¶1104 Risk management Some of the preceding paragraphs might suggest that risk management is complex and, indeed, some elements of it fall into the domain of experts, but the basic principles are straightforward and do not vary, no matter the size of the organisation. Best practice in risk management is codified in the international standard ISO 31000:2009 “Risk management — Principles and guidelines” and organisations could do worse than to invest in a copy of this standard and its Australasian counterpart AS/NZS ISO 31000:2009. These are available from any national standards organisation or directly from the international standards organisation’s website (www.iso.org). The main principles of the risk management standard are summarised below. Risk management is, or should be, a simple process carried out on a regular basis (see Figure 11.1). Figure 11.1: Risk Management Process

Communication and consultation are essential for establishing a risk management culture. By developing a simple communication plan, specifying how and when stakeholders will be involved in the risk management process, an organisation can manage stakeholder expectations. This process also helps the organisation analyse the stakeholders’ appetite for risk and establishes an important control mechanism in that it reinforces the primacy of the organisation in managing risk. Establishing the context defines the foundations on which risk management will be built and identifies elements of the external environment which may be hazardous (usually associated with sector or market hazards), as well as hazards that are internal to the organisation (usually associated with credit, liquidity, operational activities or legal hazards). The exercise to establish the context in which risk management occurs follows the communication plan and identifies the purpose of the risk management activity as part of the organisation’s strategic policy. As with any strategic objectives, risk

management objectives must be specific, measurable, achievable, realistic and time-tabled (ie SMART). They must reflect the realities of the internal and external environment and the requirements of stakeholders. Identifying hazards requires directors, managers and occasionally expert advisers (either internal or external) to take a period of dedicated time and identify potential issues for the organisation. In essence this requires answers to two apparently simple questions: • What could happen, where and when? • Why and how could it happen? The aim is to generate a comprehensive list of hazards that potentially threaten the organisation, their possible causes and potential outcomes. Hazard identification commonly employs brainstorming, scenario analysis, checklists, systems analysis or almost any form of business analytic technique. The best approach for your organisation is often the approach your board or management feels most comfortable with. Hazard identification is best facilitated by an outsider, who can bring a degree of objectivity to the process or simply ask “dumb questions” that often yield suggestions that the board or management might not have thought of. Risk analysis focuses on understanding the risks associated with each identified hazard. This in turn requires identification of the sources of risk, their positive and negative consequences, and the likelihood that those consequences will occur. Risk analysis may also identify existing controls. Much is written about sophisticated approaches to describing consequences and likelihoods (eg “probability distributions” is the most common). However, it is easier in most cases to keep it simple by adopting an approach that is common in project management. This approach defines consequences in terms of the impact on business operations and ranks them accordingly, as follows:

Rank

Consequence

1

No or little impact on operations

2

Noticeable impact on operations but can be managed with care

3

Severe impact on operations that may not be manageable (project managers refer to these consequences as “show stoppers”)

A similar ranking can be used for likelihood: Rank

Likelihood

1

Highly unlikely to occur

2

Could occur

3

Almost certain to occur

Writers on risk management commonly combine consequence ranks and likelihood ranks to give a combined risk “score” somewhere along a nine-point scale, where “1” represents a benign risk and “9” an extreme risk. These scores should be recorded on a Risk Register (see Figure 11.3 at ¶1105) but it is also useful to plot the rankings (but not too strictly) on a Risk Management Policy Matrix (see Figure 11.2), which informs the evaluation and treatment of risks associated with identified hazards. These scores too can then be recorded on the Risk Register. Experience shows that the four main blocks cover the majority of hazards and associated risks faced by organisations, but inevitably there will be some hazards whose rankings place them at the centre of the matrix. In such cases you should seek advice from a risk management professional. This advice also applies to almost all financial or legal hazards identified. Smaller companies rarely have financial or legal expertise at their disposal and are strongly advised to seek advice in these areas. Generally speaking, accountants are a good place to start such

consultation. Figure 11.2: Risk Management Policy Matrix

Evaluating hazards and associated risks entails making decisions about how to “manage” the risks faced by the organisation, through transfer (ie getting someone else to take responsibility for their management), prevention (ie removing the source of risk by actively managing it), retention (ie accepting that the risk may eventuate and that you will manage the impact), reduction (ie accepting that the risk may eventuate, but planning to reduce the impact, for example, by preparing contingency plans) or capital allocation (ie self-insurance of potential impact). This entails taking into account the objectives of risk management, as well as the management actions identified with different risk types in the policy matrix. It is also important to note that the organisation must deal with risks

associated with a positive outcome as well as those that pose a threat to organisational operations. The policy matrix applies in either case, since the actions proposed work for opportunities and threats. Hence, opportunities may be retained, transferred or avoided, as much as threats. Recording and monitoring risks and issues When you have developed a risk management profile for your organisation, you must record and monitor the identified risks and issues on a Risk Register and an Issues Register.

¶1105 Monitoring and review It is common practice in project management to log all risks and issues. This is also advisable in more general risk management and is, or should be, relatively straightforward. At its simplest, risk monitoring requires two documents, or preferably spreadsheets, for registering risks and issues. Risk Register The purpose of the Risk Register (see Figure 11.3 for an example) is to allocate a unique identifying number to each risk (eg 31.03.12-001) and record the risk type (see ¶1102), the author (who added it to the log), the date identified, the date of last update, a simple description (no jargon), the likelihood of occurrence, the severity of effect, the management plan (based on the Risk Management Policy Matrix), the owner (ie where it sits organisationally) and its status (open or closed). If a risk actually eventuates, it should be transferred to the Issues Register. Crucial aspects of risk management

Monitoring and reviewing are arguably the most important aspects of the risk management process.

Figure 11.3: Risk Register Example

Identifier Type

Date Last Author identified update

Hazard description

11.08.09- Operational CS 001

09.08.15

09.08.15 Migration of management accounts from five cost centres to one, leading to loss of control and poor forecasting

11.08.09- Sector 002

09.08.15

09.08.15 Loss of customers to competitors because of new market regulation

CS

Issues Register Like the Risk Register, the purpose of the Issues Register (see Figure 11.4 for an example) is to allocate a unique identifying number to each issue (eg 31.03.12-002) and record the issue type, the author, the date identified, the date of last update, a simple description, the management plan associated with it, the owner and its status.

Figure 11.4: Issues Register Example

Identifier Type

Date Last Author identified update

Issue Managemen description plan

11.07.29- Operational CS 001

29.07.15

09.08.15 Member of production team is in dispute with her team leader, leading to production delays

Dispute resolution by team leader supervisor

11.08.01- Liquidity 001

01.08.15

09.08.15 Error in forecasting staff salaries leading to blown budget

CFO revisin budget and exploring recovery of overrun by reducing expenditure on non-sala items

CS

Whatever the size of the organisation, both the Risk Register and the Issues Register should be reviewed at least once a week by a nominated risk officer. The organisation’s board should review risks at every meeting. Where the board has a constituted finance and audit committee, that committee is responsible for risk management.

Chapter 12: THE COMPANIES OFFICE Editorial information

Mark Forman

¶1201 Introduction The Companies Act 1993 requires the Registrar of Companies (the Registrar) to keep a register, in New Zealand, of companies incorporated in New Zealand (New Zealand companies) and companies incorporated overseas, which are carrying on business in New Zealand (overseas companies). The Companies Office, which is a business unit of the Ministry of Business, Innovation and Employment, maintains these registers on its website (www.business.govt.nz/companies). The purpose of the Companies Office website is to provide a facility for members of the public to access information about New Zealand companies and overseas companies. This chapter discusses only New Zealand companies and overseas companies. However, the Companies Office also maintains a number of registers for entities and organisations other than companies (eg building societies, friendly societies and credit unions, incorporated societies, charitable trusts, industrial and provident societies, limited partnerships and unit trusts). Information about these entities and

organisations can be found online at www.business.govt.nz/companies/learn-about/other-registers.

¶1202 Information accessible on the Companies Office website The Companies Office website is operational 24 hours a day, seven days a week (apart from the scheduled website outage when the online services will be unavailable). It stores information on New Zealand companies and overseas companies in electronic form and gives the public the ability to view and print that information. The key information relating to New Zealand companies that can be accessed on the Companies Office website by any member of the public (free of charge) includes: • the full name of the company and its incorporation number and date • the full legal name, residential address and date of appointment of each director and, if the director is also a director of a company incorporated in an enforcement country (currently only Australia), basic details relating to that company • the full legal name, residential address and shareholding of each shareholder (in most cases) • details of the company’s registered office (ie the New Zealand address notified by the company with the Companies Office as the company’s official address and the default location of its company records), address for service (ie the New Zealand address where documents addressed to the company can be delivered; it may be the company’s registered office or other address but must not be at a postal centre (eg PO Box) or document exchange (DX)) • basic details relating to the company’s ultimate holding company (if any)

• the location of the share register or other records (see ¶1207) if held away from the registered office • the total number of shares on issue • the company’s constitution (ie body of rules which, in addition to the Companies Act 1993, sets out the rights, powers and duties of the company, the directors and the shareholders), if it has one • the annual returns of the company • financial statements of the company where the company is required to file those statements (see ¶1206) • the company’s prospectuses issued under the Securities Act 1978 where the company has offered securities to members of the public in New Zealand. Note, however, that securities law in New Zealand is transitioning to a new regime, pursuant to which product disclosure statements (similar to prospectuses) are filed on the new Disclose Register, rather than the Companies Office itself, and • any official documentation relating to major restructures of the company (eg documents relating to amalgamations, liquidations, receiverships, voluntary administrations, the Takeovers Code or any court orders impacting on the structure of the company). Overseas companies that carry on business in New Zealand are required to register on the overseas register. The key information relating to overseas companies, which can be accessed on the Companies Office website by any member of the public (free of charge), includes: • overseas company name, overseas company number and the date on which it was registered as an overseas company • country of origin • the constitution of the overseas company (if any)

• the full legal name and residential address of each director • address of its principal place of business in New Zealand, and • the name and address of the persons who are authorised to accept service in New Zealand of documents on behalf of the overseas company. For other details about the overseas company (including information on its shareholder(s) and registered office), the registry in the country where the company is incorporated should be searched. Such information is not registrable on the Companies Office website. Currency of information The information listed above is only as current or accurate as the relevant company is diligent in complying with its filing obligations. Access to information about company directors Note that members of the public are able to access on the Companies Office website the name and residential address of each director of a company. New Zealand companies are also required to provide the Companies Office with the date and place of birth of each director, but this information is not publically available.

¶1203 Incorporating a New Zealand company or registering an overseas company New Zealand companies

Incorporating a New Zealand company is a relatively straightforward exercise that can be completed online on the Companies Office website. Any member of the public can incorporate a company. In order for a company to be incorporated, an applicant must first reserve a company name. The reserved name cannot be offensive, identical or almost identical to another company’s name. Further, the name cannot contravene an enactment (eg the Trade Marks Act 2002). An easy way to check your company name is to do a name search on the Companies Office website and a registered trade mark search on the Intellectual Property Office of New Zealand (IPONZ) website. If the name is accepted by the Companies Office, the applicant must provide further information to the Companies Office, as outlined in Figure 12.1 below.

Figure 12.1: Information required for New Zealand company incorporation Information Required for New Zealand Company Incorporation Full legal names of the shareholders, their shareholdings and their addresses (residential if individual, registered office if corporate) Consent form of each shareholder The company’s registered office and address for service (both must be physical addresses in New Zealand and not a PO Box or DX) and address for communication Email address for communications from the Companies Office Full legal names of the directors, their residential addresses and their date and place of birth Consent form of each director Note that every company must have at least one

✓

director that either (i) lives in New Zealand, or (ii) lives in an enforcement country and is a director of a company registered in that country. Currently, Australia is the only prescribed enforcement country. For any director who lives in Australia, indicate whether he or she is also a director of a company incorporated in Australia. If he or she is, that director will need to provide the name, ACN and registered office address of the company incorporated in Australia. Details of the ultimate holding company (if any) being: •

entity type

•

company name

•

country of registration

•

registration number or code (if applicable), and

•

registered office address

The company’s constitution (if it has one) The month in which the company wishes to file its annual return (this cannot be December or January) Applicants must also provide signed consent forms (in the prescribed Companies Office format) from all directors and shareholders. If a form is executed by an attorney under a power of attorney, a certificate of non-revocation must be provided with the forms. In certain circumstances, the Companies Office may request additional information regarding the proposed directors and shareholders before it processes an application to incorporate a company. Additional information that the Companies Office may request can include a certified copy or original hardcopy of proof of residential address for each named director, the appropriate resolution of the proposed shareholder (if it is not a natural person) agreeing to become a shareholder, certificate of incorporation of the proposed

shareholder if it is an overseas entity and proof of identity for all persons who have signed consent forms. Applicants have the option of applying for Inland Revenue and GST numbers and registering as an employee at the time of incorporation using the Companies Office’s online platform. However, if 25% or more of the company’s shares are owned or controlled by overseas shareholders, the company can only apply for such tax registrations after it has been incorporated and has opened a New Zealand bank account; the Companies Office’s online platform cannot be used. If application for such tax registrations is not made on incorporation, a separate filing with Inland Revenue will need to be completed. A small fee, which can be paid via the Companies Office website, applies to the name reservation and also to the incorporation of a New Zealand company. See Figure 12.4 for a list of records that must be kept by a New Zealand company at its registered office. Overseas companies Overseas companies must apply to the Registrar for registration as an overseas company, within 10 working days of commencing to carry on business in New Zealand. As with a New Zealand company, the applicant will need to reserve a company name. If the name reservation is accepted, the applicant will need to provide the Companies Office with certain information to register the overseas company. Figure 12.2 below sets out the information required to register overseas companies from all jurisdictions, except Australia. To register an Australian overseas company, only the details, as listed in Figure 12.3 below, specific to New Zealand are required. The New Zealand Companies Office and the Australian Securities & Investments Commission have modified their legislation to allow each jurisdiction to supply documents to one another during the registration process. Australian companies, therefore, do not need to file the same information in both Australia and New Zealand.

Figure 12.2: Information required for overseas company registration (All jurisdictions except Australia) Information Required for Overseas Company Registration The principal place of business and address of the person/s authorised to accept service for the company in New Zealand (both must be physical addresses in New Zealand and not a PO Box or DX) An address for communication Email address or contact phone number for communications from the Companies Office The date on which the company commenced carrying on business in New Zealand The month in which the company wishes to file its annual return The month of the company’s balance date (see ¶1206) A certified copy of the company’s incorporation certificate or other evidence of its incorporation, specifying the country of origin (translated into English and certified in accordance with regulation 9 of the Companies Act 1993 Regulations 1994) The full legal names of the directors and their residential addresses The company’s constitutional document if it has one (translated into English and certified in accordance with regulation 9 of the Companies Act 1993 Regulations 1994)

✓

Figure 12.3: Information required for Australian overseas company registration Information Required for Australian Overseas Company Registration

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The date on which the company commenced carrying on business in New Zealand The month of the company’s balance date The month in which the company wishes to file its annual return The principal place of business in New Zealand, the address of the person/s authorised to accept service for the company in New Zealand and an address for communication (both must be physical addresses in New Zealand and not a PO Box or DX) A small fee, which can be paid via the Companies Office website, applies to the name reservation and to the registration of an overseas company.

¶1204 Updating company details on the Companies Office website The Companies Office website allows people with company authority (granted by the Companies Office to directors of a company and certain people authorised by the company) to register information about a company with the Companies Office website and to amend that information. The company authority system replaced the company key, which was a seven-character password that allowed authorised people to undertake activities equivalent to those permitted by people with company authority. Company authority is granted to the person (and their organisation)

who incorporated the company. Other people can obtain company authority via the Companies Office website if they have access to the company key or if they obtain the authority of a person who already holds company authority. The Companies Office website provides a facility to obtain company authority in this way. If you cannot obtain access from one of these methods, you can apply to the Registrar for approval — this will be granted to individuals who provide proof of identity or to organisations if they provide a letter of authorisation, the form of which is available on the Companies Office website. Directors can revoke company authority on the Companies Office website and authorised persons who no longer require access to a company’s details can also revoke their own authority online. Companies must notify the Registrar of certain events that affect the company so that members of the public have access to up-to-date information. Notifications can be made on the Companies Office website and are recorded on the company’s individual profile page on the website. Events that must be notified to the Registrar are listed in Figure 12.4 below.

Figure 12.4: Events that must be notified to Registrar of Companies Events that must be notified to Registrar of Companies Appointment of directors, directors ceasing to hold office, changes to directors’ addresses, changes to directors’ names, Australian directorship information if the director lives in Australia Changes in the company’s ultimate holding company information Issues and buybacks of shares Changes to company addresses Changes to the company name

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Adoption, amendment or revocation of the Constitution Annual returns Audited financial statements (if required to be filed) Certain court orders impacting on the structure of the company Certain liquidation, receivership, voluntary administration, amalgamation and prospectus documentation. Note, however, that securities law in New Zealand is transitioning to a new regime, pursuant to which product disclosure statements (similar to prospectuses) are filed on the new Disclose Register, rather than the Companies Office itself Notes: •

Transfers of shares between shareholders do not need to be notified to the Companies Office, but it would be good practice to do so. Transfers of shares do need to be recorded in the company’s share register and also the shareholding details will need to be correct at the time the company files its annual return.

•

This is not an exhaustive list of events that must be notified to the Registrar.

The Companies Office will provide, in some circumstances, advance notifications/warnings of annual filing requirements to company directors (eg the Companies Office will notify the company in advance of the annual return being due).

¶1205 Filing annual returns with the Companies Office An annual return is an annual update to the Companies Office of the key information about a company as at the annual return filing date. A

full list of the information to be contained in an annual return is set out in schedule 4 of the Companies Act 1993, as amended from time to time and includes, among other things: • any changes in corporate details (eg changes to details about directors, shareholders, shares, and the company addresses and annual return reminder details). For companies incorporated prior to 1 May 2015 and filing annual returns after 1 July 2015, details of each director’s date and place of birth and the details of the company’s ultimate holding company (if it has one) will need to be provided to the Companies Office as part of the annual return. However, it is good practice to ensure that key information relating to the company is kept up to date on the Companies Office at all times, regardless of whether or not the information is required to be updated on the Companies Office. It is important to note that an annual return is not a company’s financial statements or tax return — it is simply an annual administrative requirement for a company to provide certain details to the Companies Office. It does not include details of the financial performance of the company. The filing of an annual return is a separate requirement to the filing of financial statements (see ¶1206). Annual return filing requirements Every New Zealand company and overseas company is required to file an annual return (other than in the calendar year of its incorporation). The month in which the annual return is required to be filed can be selected when the company is incorporated (it cannot be December or January). The Companies Office will send reminders by email or text message (to the email address or contact phone number that has been provided to the Companies Office). The first reminder will be sent on the first working day of the month that the annual return is due. If the annual return has not been

filed by the third week of the filing month, another reminder will be sent. A final reminder will be sent approximately one week after the annual return was due if it has not been filed during the annual return filing month.

¶1206 Filing financial statements with the Companies Office Balance date All New Zealand companies and overseas companies have, by default, a balance date in each calendar year. If a company has just been formed or incorporated, the first balance date must be no later than 15 months after the date of incorporation and no later than the calendar year following the company’s incorporation. Most companies have, by default, a balance date of 31 March and a 12-month financial year. If necessary, a company can change its balance date with the approval of the Commissioner of Inland Revenue. In particular, if a company or overseas company is required to prepare group financial statements under the Companies Act 1993, it must ensure that the balance date of each subsidiary of the company is the same as the balance date of the company (unless, in the board’s opinion, there are good reasons against this). If the company changes its balance date, the period between any two balance dates must not exceed 15 months. Overview to filing financial statements Under the Companies Act, the obligation to file financial statements applies to: • a “large” overseas company • a “large” company in which shares that in aggregate carry the right to exercise, or control the exercise of, 25% or more of the voting power at a meeting of the company are held by:

— a subsidiary of a body corporate incorporated outside New Zealand — a body corporate incorporated outside New Zealand, or — a person “not ordinarily resident” in New Zealand. However, a “large” company or an overseas company that is an “inactive entity” does not need to file financial statements, provided that it has filed an “inactive declaration”. Note that this section only discusses the obligation of New Zealand companies and overseas companies to file financial statements with the Companies Office, pursuant to the Companies Act. See chapter 3 for more information on financial statements. Further, this section does not address companies that are “FMC reporting entities” under the Financial Markets Conduct Act 2013 or issuers under the Securities Act 1978. Filings required Companies or overseas companies that are required to file financial statements with the Companies Office must deliver the following documents to the Registrar within five months after its balance date, together with payment of the prescribed fee: • copies of their financial statements or (if the company or the overseas company has one or more subsidiaries) group financial statements completed in relation to that balance date, and • a copy of the auditor’s report on those statements. In addition, the financial statements or group financial statements of a “large” overseas company must include the financial statements of its New Zealand business if the business is “large”, together with the audit report on those financial statements. Once filed, the financial statements will be accessible to any member of the public from the Companies Office website. Definition of “large”

A company (other than an overseas company or a subsidiary of an overseas company) is “large” in respect of an accounting period if at least one of the following criteria applies: • as at the balance date of each of the two preceding accounting periods, the total assets of the entity and its subsidiaries (if any) exceed $60 million • in each of the two preceding accounting periods, the total revenue of the entity and its subsidiaries (if any) exceeds $30 million. An overseas company or a subsidiary of an overseas company is “large” in respect of an accounting period if at least one of the following criteria applies: • as at the balance date of each of the two preceding accounting periods, the total assets of the entity and its subsidiaries (if any) exceed $20 million • in each of the two preceding accounting periods, the total revenue of the entity and its subsidiaries (if any) exceeds $10 million. In respect of an overseas company, its New Zealand business or its group’s New Zealand business is “large” in respect of an accounting period if at least one of the following criteria applies (calculated as if that business was an entity): • as at the balance date of each of the two preceding accounting periods, the total assets of the business exceed $20 million • in each of the two preceding accounting periods, the total revenue of the business exceeds $10 million. Inactive entities An entity will not be considered “large” in respect of an accounting period if it was an “inactive entity” and, within five months after the end of that period, it delivers to the Companies Office an inactive declaration (in the form set out in the Schedule to the Financial Reporting Regulations 2015).

An entity is an “inactive entity” in respect of an accounting period if: • it has not (or been deemed to have) derived any income, has no expenses and has not (or been deemed to have) disposed of any assets during that period, and • at the end of that period, it has no subsidiaries or all of its subsidiaries are inactive entities in respect of that period. When determining whether an entity is inactive, the following items may not be taken account of: • statutory company filing fees or associated accounting or other costs • bank charges or other minimal administration costs totalling not more than $50 in the accounting period, or • interest earned on any bank account during the accounting period, to the extent that the total interest does not exceed the total of any charges or costs incurred by the entity to which the immediately preceding bullet point applies. Other exceptions New Zealand incorporated companies and overseas companies that have obligations to file financial statements may, in some circumstances, be able to rely on the grouping exclusions under the Companies Act so as not to file their financial statements. In general, group exclusions apply where a company or an overseas company’s holding company is a New Zealand incorporated company, and that holding company files a copy of the group financial statements and a copy of the auditor’s report on those statements with the Companies Office. However, the grouping exclusion provisions in the Companies Act are technical and need to be carefully analysed in each case. The Companies Office may, in certain circumstances, exempt a large overseas company (or any class of large overseas companies) from filing financial statements or group financial statements.

¶1207 Maintaining company records A New Zealand company must keep certain records at its registered office. The records required to be kept by a company under the Companies Act 1993 are listed in Figure 12.5 below.

Figure 12.5: Records that must be kept at company’s registered office Records That Must Be Kept At Company’s Registered Office The company’s constitution (if it has one) Minutes of all meetings and resolutions of directors, directors’ committees and shareholders for the previous seven years The interests register Directors’ certificates signed pursuant to the Companies Act 1993 during the previous seven years The full names and addresses of current directors Copies of all written communications to all shareholders or all holders of the same class of shares during the previous 10 years (including annual reports required under the Companies Act) Copies of all financial statements and group financial statements required to be completed by the Companies Act or any other enactment for the previous seven completed accounting periods The accounting records required by s 194 of

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the Companies Act for the current period and the previous seven completed accounting periods of the company The share register Note: This is not an exhaustive list of records that need to be kept by a company. Other legislation, in particular tax legislation, requires other records to be kept for a certain period of time. Note that these records, with the exception of the share register, may be kept elsewhere in New Zealand provided that the Companies Office is notified within 10 working days of their being kept elsewhere. The share register, however, may be kept at two or more locations if permitted by the constitution and with notice given to the Companies Office within 10 working days after the share register is divided or any place where the share register is kept is altered. This means that a copy (or copies) of the share register may be kept away from the registered office. The principal register must be kept in New Zealand and a copy of every register must be kept at the same place as the principal register. The Companies Act requires that the principal register must be updated within 10 working days of a change being made to a register kept elsewhere. Listed companies typically take advantage of this provision for duplicate share registers when they employ a third party to maintain an electronic share register. Registered office holds official record of company information As discussed at ¶1204 and ¶1205, the Companies Office website must be updated with changes to certain information about the company. However, it is important to note that, in relation to shareholdings and directorships, the company records kept at the registered office, and not the information contained on the

website, comprise the official record of that information and it is, therefore, important that these records are kept up to date.

Chapter 13: BUSINESS STRATEGY Editorial information

Karen Martyn

¶1301 Introduction Business strategy is possibly the most misunderstood element of business. For a summary of what strategy is and how it differs from operational effectiveness, you are strongly recommended to read “Remember competitive strategy? Remember Michael Porter?”.1 Professor Michael Porter of Harvard Business School is a leading authority on business strategy theory and practice. This chapter uses a model for strategic business planning based on his work. In this chapter the term “company” is used to refer to all types of organisations: companies, trusts and societies, commercial and notfor-profit entities. Footnotes 1

T Kippenberger “Remember competitive strategy? Remember Michael Porter?” (1997) 2(1) The Antidote 20– 23.

¶1302 Strategy is a plan to win So what is this maligned thing that is known as strategy? It is a structured approach to thinking about how best to move a business forward. There are at least a dozen approaches.2 This chapter discusses a practical and proven approach to strategy based on Professor Michael Porter’s work, which was adapted in New Zealand for the ExcelleNZ programme, a 1980s government initiative for teaching business strategy. The concept of strategy comes straight from the military, like so many management titles (eg financial officer, human resources officer) and other concepts (eg mission, objective and target). A strategy is a plan outlining how you are going to win against your competition in the context of your environment. Strong strategy requires a consistent pattern of decision making. Consistency and congruence between decisions are the glue that holds the strategy together and keeps everyone working in the same direction, concentrating a business’s resources on the same target. Fundamentally, strategy involves either doing different activities than your competitors or doing the same activities differently. If two organisations offer the same product or service in the same way, customers will not see any differences and will not develop a preference or brand loyalty. Price and convenience will determine purchasing decisions. A strategy differentiates how your organisation is going to win in the environment in which it is competing. Strategic analysis Strategic analysis is needed to create the strategic plan. This chapter provides basic strategic analysis tools to help your board develop a strategic plan. Strategic analysis involves identifying where you want to go, where you are, what resources you have and

what resources you will need. Deciding how you will navigate the path from here to competing successfully against those vying for the same customers or resources is your strategy. Footnotes 2

See H Mintzberg, B Ahlstrand and J Lampel Strategy Safari — A Guided Tour through the Wilds of Strategic Management (Free Press, New York, 1998).

¶1303 Sustainable competitive advantage is lynchpin of strategy The strategic planning model defines three key elements for developing and then monitoring implementation of the business strategy: key business drivers, functional strategies, and measurement and monitoring of the strategy. Key business drivers Business strategy is driven by four key drivers: • the vision • the mission • the sustainable competitive advantage (SCA), and • the business values. These four key drivers are set by the board, with vision and values enduring for the life of the organisation, its core purpose and values, and the mission and SCA meant to last until changes to the environment require changes to the core business focus and capability.

Functional strategies Functional strategies support the governing business strategy and can be divided into two groups: • prime-moving strategies (ie marketing strategy and product/service strategy), and • enabling strategies (ie human resources (HR) strategy, innovation strategy, information technology (IT) strategy and finance strategy). There is a growing body of evidence that IT strategy may be the key to an effective marketing and delivery strategy, in which case it is a prime-moving strategy. For example, Amazon’s IT strategy has been key in that company’s success. Measuring and monitoring the business strategy To ensure that the business strategy is implemented and produces the expected customer behaviours (ie increasing sales), the board and management set milestone measures for assessing (annually at least and more often if the organisation needs to be responsive to a volatile market) progress towards the company’s ultimate strategic objectives. They then monitor the progressive results and adjust the policies as needed to reach the strategic goals. Overall strategy includes key business drivers and functional strategies The vision, mission, SCA and values are the key drivers of the business strategy. The SCA is the lynchpin that keeps the functional strategies (ie marketing, product/service, HR, innovation, IT and finance) focused on the same target. The model discussed in this chapter is aimed at service businesses which may also offer tangible products. If you are in manufacturing, you will need to add manufacturing issues and strategy to the planning process.

¶1304 Vision statement The purpose of the vision statement is to inspire employees. It

encapsulates the organisation’s highest purpose and can help employees understand how their efforts (and sacrifices) contribute to this goal. The presence of a vision statement has become an indication of a well-led organisation. The concept of defining a vision did not come from the military. Before the 1980s, no one spoke of company or organisational “vision”. Then, in 1982, Warren Bennis, a pioneer in the field of leadership studies, stated that “Leadership is the capacity to translate vision into reality”.3 Bennis and successive promoters of vision (and visionary leadership) were inspired by the success of charismatic leaders (eg Mahatma Gandhi, Martin Luther King, Nelson Mandela) who were able to inspire their followers with succinct statements about the goals toward which their efforts were directed (eg equal rights and world peace). These visionary statements inspired their followers so that, even if they were enduring hardship or being threatened with harm, the followers persisted, knowing their actions and efforts were contributing to a greater good. These leaders were able to inspire their followers to look beyond self-interest and work towards their collective goals (eg making the world a better place). Bennis and others asserted that good corporate leaders did the same thing and vision statements became popular. Examples of good vision statements include: • Environmental Science and Research (ESR): “Protecting people and the environment through science” • General Electric (GE): “We bring good things to life” • Harley-Davidson: “To fulfil dreams through the experiences of motorcycling” • Greenpeace: “We share our planet: help us remind those who forget”, and • Apple: “To make a contribution to the world by making tools for the mind”. Not all visions come in short phrases. The Johnson & Johnson Credo

combines the vision and values statements all in one. It talks about customers, employees and the community. It cannot easily be memorised but has endured for over a 100 years, is explicitly taught to every employee and constantly referred to in decision making.4 Most people are not stimulated by the thought of contributing to a company’s profit or glory (eg “we are the biggest, most profitable, most preferred, best …”). Employees want the work they do to have meaning to the world, to leave it a better place. Making a company the “most preferred” does not make the world a better place. Because many people are not inherently competitive, a vision of “being the best” is not universally motivating. A vision statement must capture the meaningful contribution of the company’s services and/or products. Vision statements that reflect the business owners’ monetary goals are uninspiring slogans that do not generate buy-in from the workers or engage their hearts and commitment. A vision statement is optional because its absence is better than an uninspiring or demotivating one. Companies without a vision statement may do just as well as companies with one. The vision statement is the icing on the culture (cake) of the company; delicious but not necessary to a good culture and unable to make a poor one good. Guide for creating a vision statement The five criteria for a good vision statement are: 1. It is enduring — it is meant to last the lifetime of the organisation. 2. It is not a marketing slogan promoting the product or service or focused on self-aggrandisement of the company (eg it is not “we will be the biggest, the best, the most preferred”). 3. It is short and concise — everyone can remember it and understand it without an explanation. 4. It alludes to the contribution to the consumer, the community or the world that the organisation makes.

5. It makes employees feel proud about what they are helping to provide or build. Creation of a vision statement is not easy. Plan on at least four hours and be prepared to spend more time if necessary. Step 1: Brainstorm answers to the following questions (without criticising any ideas or suggestions and being sure to record them all): • What does our organisation do for the consumer/community/world? • How do the services/products we offer make others feel? What effect do our products/services have on consumers/the community/recipients of those services? • What is the purpose of the services we provide? Use the infinitive (eg to protect, to care for, to enhance, to help, to make easier, to bring). Step 2: Record all suggestions on a flip chart. Step 3: Separate what you do (eg protect people and the environment, fulfil dreams, make good things), how you do it (eg through science, the experience of motorcycling) and those who receive the benefit (eg life, people, children, animals, the world). Step 4: Get clear consensus on what the contribution or purpose is and who benefits. For example, when ESR was brainstorming, they needed to add that they protected “through science” to differentiate their contribution from that of the police and others who protect people through other means. Step 5: Check your vision statement against the five criteria listed above. Step 6: Test it by asking employees: “Do you think we … [state the vision]?” If employees agree that the vision statement captures the greatest contribution the company and their labours make, you have identified the vision. If you elect not to have a vision statement, remember that it is not a

requirement and that your values statements will tell people how you achieve your mission. Footnotes 3

W Bennis “Leadership transforms vision into action” (May 1982) Industry Week at 54–56.

4

See www.jnj.com/connect/about-jnj.

¶1305 Mission statement The concept of “the mission” comes straight from the military where the mission defines the objective. In business, the mission defines the core services and/or products the business provides, the markets it focuses on and the scope of activities it engages in to deliver those services or products. The mission statement encapsulates the core business focus. In one short statement, it concisely tells people (potential customers and its own employees) what the business is about. Over time, the mission statement may undergo change as the business alters its focus. This is usually due to environmental changes that demand alterations in the business. For example, many printing businesses that focused on printing bank cheques were forced to change their business focus with the advent of online cheque-free banking. Guide for creating a mission statement Step 1: Using a flip chart, brainstorm the services or products (or service or product categories) that your business focuses on. For example, if your business makes dressings, surgical tapes, wound closure strips, immobilisation products, drapes, gowns, masks and hand-hygiene products, list this as the product category “healthcare supplies” or “medical supplies” and not as the individual products.

The mission statement is not meant to reflect every type of work your business engages in. It should capture 80% of what you do and serve as a guide to potential customers, employees and management about what the core business is, who it aims to serve and the activities your business offers to support the core services/products. If you have difficulty agreeing on the services/products that you should be offering, you may need to do a SWOT (strengths, weaknesses, opportunities and threats) analysis to clarify the best choices for the selection of services/products and markets. See step 4 below. Step 2: On a separate flip chart sheet, brainstorm the specific markets to which you offer your services/products. Specifying the markets helps focus your marketing resources. For example, the markets for this book are small- to medium-sized enterprises (SMEs) and not-forprofit (NFP) organisations. Although it could be useful to the whole governance market, it is not focused on meeting the needs of every type of organisation (eg it does not cater to publicly listed companies or manufacturers). If you have difficulty defining the markets that you should be targeting, you may need to do a SWOT analysis to clarify this. See step 4 below. Step 3: On a separate flip chart sheet list the scope of activities that you engage in to support your core services/products. The two examples below explain this concept.

Example 1 A hotel offers accommodation aimed at business travellers (but not families or tourists) — that is its core service/product. To support this core service/product, the hotel provides food services (eg a restaurant and room service), laundry and dry cleaning, a gym, a concierge and numerous other services. Because these additional supporting activities are widely known by potential customers, the hotel can claim to be “a full services hotel” with the following mission statement: “We are a full services boutique hotel catering to the business traveller”. In this example, the scope of activities is defined as “full services” because the scope of these activities is widely known.

Example 2 A seller of submersible pumps has to define the scope of the activities it offers to support its core products (ie the submersible pumps). The company’s mission statement succinctly states: “We design, manufacture and repair submersible pumps for the New Zealand construction industry”. In this example, the scope of activities (or at least 80%) has to be spelt out as “design, manufacture and repair” to make clear what the company offers (and what it does not offer by omission).

Mission statements clearly identify an organisation’s core services/products, the scope of activities to support the core services/products and the markets it serves. In the second example above, the products are submersible pumps, the market focus is the New Zealand construction industry and the scope of activities includes design, manufacture and repair. All employees and actual and potential customers can readily understand and recall the business’s products, markets and scope of activities. A succinct, easily remembered mission statement guides employees and aids customers to clearly understand and remember what the business is about. Step 4: If you have difficulty identifying and agreeing on your core services/products and markets, you may need to do a SWOT analysis to clarify the best choices for the selection of services/products and markets. A SWOT analysis examines the strengths, weaknesses, opportunities and threats (hence the first letter of each of these words spells SWOT) the organisation faces and helps identify which services/products and markets present the most likely (and least likely) opportunities for success in the context of your environment. To do a SWOT analysis, select the three most successful competitors

for the company’s services/products and markets. They do not have to be direct competitors. For example, they may be competing for the same resources (eg government grants) or in the same market space (eg call centre solicitation of donations) but offering different services/products. List the competitors’ names in the same order on the External Analysis Sheet (Figure 13.1) and the Internal Analysis Sheet (Figure 13.2).

Figure 13.1: External Analysis Sheet Competitors Competitor #1 Their strengths Their weaknesses Their competitive advantage

Competitor #2 Their strengths Their weaknesses Their competitive advantage

Competitor #3 Their strengths Their weaknesses Their competitive advantage

Our key opportunities

Our key threats

On the External Analysis Sheet, list each competitor with its services/products and market strengths (eg national coverage, strong brand identity, exclusive distribution agreements) and its weaknesses (eg small product range, no after-sales service, no online sales channel). You can use the strengths and weaknesses listed for your competitors to identify your company’s threats and opportunities. Draw on the competitors’ strengths to summarise the key threats to your company and record these in the box on the External Analysis Sheet labelled “Our key threats”. Summarise your key opportunities based on the competitors’ weaknesses and list them in the box entitled “Our key opportunities” on the External Analysis Sheet. These opportunities may indicate services/products or markets that you can exploit because the competitors are weak in these areas.

Figure 13.2: Internal Analysis Sheet Competitors Competitor #1 Our relative strengths Our relative weaknesses

Competitor #2 Our relative strengths

Our relative weaknesses

Competitor #3 Our relative strengths Our relative weaknesses Our key strengths

Our key weaknesses

On the Internal Analysis Sheet, list your company’s strengths and weaknesses in relation to each competitor. Try not to list the same things you listed in the external analysis. The internal analysis focuses on your company’s services/products and markets in relation to your competitors. Summarise your company’s key weaknesses relative to your competitors and what the customer wants that you do not provide, and list this information in the box entitled “Our key weaknesses” on the Internal Analysis Sheet (Figure 13.2). Summarise your company’s key strengths relative to the three competitors and customer demands that you alone can satisfy and list these in the box entitled “Our key strengths” on the sheet. Figure 13.3: Business Mission Development Sheet

Next, transfer to the Business Mission Development Sheet (Figure 13.3) the key opportunities, key threats, key strengths and key weaknesses you have identified for your company. This should enable you to identify the services/products and markets that are most likely to be successful for the company. It also identifies possibilities where increased investment could make current weaknesses strong enough to capture identified opportunities. This sheet should also clarify services/products and markets where you have little chance of success because of your weaknesses and competitors’ strengths (ie threats to your business). Step 5: Once you have identified the most likely services/products and markets and the corresponding scope of activities to support those choices, write them into a short, simple business mission statement (Figure 13.4). Check that the statement is short and clearly states the services/products, scope of activities and markets without unnecessary qualifiers. Can you easily remember it? Display it on the wall, as you will need to refer to it frequently during the rest of the strategy planning. Remember that it needs to capture the essence

(about 80%) of your mission — it does not have to capture everything you offer.

Figure 13.4: Business Mission Statement Our Business Mission We …

¶1306 Sustainable competitive advantage statement Companies that focus on their sustainable competitive advantage (SCA) are more successful than those that do not. A SCA is an enduring, unique capability that enables an organisation to perform better than its competitors.

Example Many years ago Sony chose “pocketability” as the key characteristic (ie SCA) it wanted to differentiate its products from its competitors’ products. Sony researched and invested in miniaturisation, a feature preferred by many customers. It set this as the desirable characteristic and rewarded employees who advanced product solutions that exemplified “pocketability”.

One benefit of identifying your competitive advantage is that you invest in it and protect it. You increase the pace of innovation of that advantage and guard against complacency which would allow competitors to overtake your advantage with one of their own. Some monopolies enjoy a competitive advantage that cannot be overcome without a change in technology or legislation. For example,

if you own the only gold mine in the region and importing costs are a significant barrier to competition, the only threats to your SCA are: • a change in technology (eg development of a gold location and extraction technology that is environmentally friendly and relatively inexpensive) • a significant reduction in importing costs (unlikely) • a new product substitute, or • legislation that breaks up your monopoly. The new technology or service/product substitute could be cheaper to purchase and/or offer greater benefits that have more value to consumers than your service/products offer. Think about how the iPod has affected sales of such items as MP3 players, CD players and other portable audio devices. A competitive advantage is only sustainable if it cannot readily be copied by competitors. Having the only piece of equipment that can do particular operations quicker and cheaper than others is only a sustainable advantage if no one else can purchase the same or similar equipment. If competitors can replicate your advantage by purchasing or leasing equipment, your advantage is not sustainable. Examples of sustainable competitive advantages include: • employing the most highly trained experts in a field and creating a work environment that retains and continues to develop them • creating an enviable service culture, which both employees and customers appreciate and feel loyal to, and • building a high-quality culture that offers customers the greatest service/product reliability and employees high job satisfaction not available elsewhere. These intangible SCAs are difficult to replicate and thus more sustainable provided the companies maintain their advantage.

Example Kiwi-owned Kiwibank and Air New Zealand promote their “home-town” competitive advantage. Some Kiwis will pay a (small) premium or forgo minor product or services benefits to support local businesses. Other customers will readily switch brands to gain cost savings or other benefits.

Guide to identifying your sustainable competitive advantage Because competitive advantage can come from so many factors, it requires extensive brainstorming and evaluation of your business’s critical success factors to identify the most appropriate and strongest SCA. Step 1: Brainstorm (without criticising any ideas and recording all contributions in the suggesters’ words) and record on a flip chart those things that must be done well to ensure the future success of the business. These may be business activities, resource characteristics or service/product characteristics. Ask the following questions: • In what ways are information and technology impacting and disrupting our sector? • Do our service/product characteristics meet our customers’ expectations? • Why do customers buy these services/products? Is this sustainable? • What unique resources do we have or could we create that are not readily available to competitors? • What culture must we have to gain a competitive advantage?

• What is our organisation’s strategic change capability? The answers may be inputs into your list of critical success factors (CSFs) (see Figure 13.5).

Figure 13.5: Critical Success Factors Sheet 1

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Step 2: Once you have an exhaustive, numbered list of CSFs, make a flip chart-sized copy of the Critical Success Factors Rating Chart below (Figure 13.6).

Figure 13.6: Critical Success Factors Rating Chart 1

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Take the first CSF listed on the Critical Success Factors Sheet and rate its value to customers on a scale of 0–4 where 0 (low) represents “no value to customers” and 4 represents “extremely high value to customers”. Keep this figure (between 0 and 4) in your mind. Then, for the same CSF, ask yourself, on a scale of 0–4, how much this CSF differentiates your company from your competitors. If all your competitors also have the same CSF to the same or greater degree, your answer is zero. If you have (or could have) this CSF in greater abundance than your competitors and it makes a significant point of difference between you and them, give it the appropriate value. Now that you have both figures (ie value to customers and ability to differentiate from competitors), enter the numerical value for this CSF (ie number “1”) on the chart in the corresponding point where the two values cross. See Figure 13.7 for an example of rating CSFs.

Figure 13.7: Critical Success Factors Rating Chart Example 1 Obtaining qualitative and quantitative customer

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expectations and perceptions and using results to improve services 2 Offering online payment facility

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3 Employing highly trained, knowledgeable staff

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4 Providing practical, easy-touse after-service instructions

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5 Improving quality assurance of all documents and materials before release

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Critical Success Factor Rating

Ability to Differentiate from Competitors

Value as Perceived by Customers

1* = 2, 3

2 — Some competitors

3 — Those surveyed see

survey customers and some do not

that the company is trying to improve and therefore raise their expectations of improved service in future. Their perception of actual improvement will be highly valued.

2 = 4, 2

4 — Research shows that 2 — Customer feedback no competitors offer this is mixed, with some facility valuing and some not valuing this facility

3* = 1, 4

1 — Nearly all competitors have staff who are better trained and more knowledgeable

4 — Customers value highly trained, knowledgeable staff very much

4 = 4, 4

4 — No competitors offer this

4 — Customer feedback indicates that this would be highly valued

5* = 1, 3

1 — Most competitors produce more professional-looking, error-free documents and material

3 — Customers expect and value error-free, professional-level documents and material

Step 3: Repeat step 2 with each CSF until you have all CSFs rated and marked on the Critical Success Factors Rating Chart. Step 4: Highlight the CSFs (in the upper right quadrant) that have the most pervasive impact on your company’s internal behaviour. Is there one that stands out from the rest? Does it make sense that this is the most critical success factor? Congratulations! You have identified your sustainable competitive advantage. If you have several CSFs all rated the same and no clear winner, you will need to go back and further discuss these factors, challenging their ratings and re-rating until you can isolate and identify the single

CSF that would have the most pervasive impact on internal behaviour and captures the essence of the company’s future competitive strength. Step 5: Write the identified SCA on a separate flip chart in the following format: “We will win by [fill in your SCA]”. Then add beneath that: “As measured by [enter the measure you will use to evaluate your progress towards achieving this objective]” (see Figure 13.8). Like other measures in the strategic plan, measures applied to SCAs should follow the SMART format (ie they should be specific, measurable, achievable, realistic and time-tabled). Measure your SCAs as often as required (usually quarterly to annually) to give you timely information and allow you to make corrections or adjustments at least annually.

Figure 13.8: Our Sustainable Competitive Advantage We win by … as measured by … Display the SCA for constant reference throughout this planning exercise and make sure it is visible to all employees and in board and management meetings. Even after the strategic planning is complete, the SCA should be prominently displayed so that all subsequent board and company decisions comply with it. Some CSFs may be key issues that will need to be addressed when you develop functional strategies. Retain all templates for use later in the planning. Take note of those CSFs that fall into the lower left quadrant of low value to customers and low ability to differentiate your business from your competitors. You will probably not want to invest further in these factors. Footnotes *

It is important to note that CSFs rated as highly valued by

customers may have to be implemented well to compete even though they do not offer a sustainable competitive advantage. *

It is important to note that CSFs rated as highly valued by customers may have to be implemented well to compete even though they do not offer a sustainable competitive advantage.

*

It is important to note that CSFs rated as highly valued by customers may have to be implemented well to compete even though they do not offer a sustainable competitive advantage.

¶1307 Business values shape strategy Explicit business values serve as a guide to how a business should be conducted, shaping the culture of the business that employees and customers experience. As BusinessNZ chief executive Phil O’Reilly says: “… often one or more [value] will have a key impact on the company’s commercial success”. The critical importance of values is that they can enable company success. While most companies have a list of several values, often one or more will have a key impact on the company’s commercial success. The chart below lists the values of some prominent companies that have helped enable their success.

Figure 13.9: Values Enabling Company Success Company

Value

Success factor

Apple Computers

Ease of use

Products are intuitive

to use Marriott Hotels

Systemisation and standardisation

Duplicated standard model hotel across large chain

Merck

Quality and purity of products

Gave confidence to purchasers of medicines and pharmaceuticals

The Warehouse

Everyone gets a bargain

Cut-price goods

Newmont

Set standards of Restoration and excellence regarding rehabilitation of environmental matters former mining sites

Adobe

Simplicity

Enabling nonspecialists to manipulate digital content

Dow Chemicals

Mastery of science and technology

Innovative products and techniques

IBM

Trust and personal responsibility in relationships

Helped forge relationships on which IBM sales were made

Dell

Easy to buy, easy to own

Early promoter of risk-free returns, athome assistance and free product recycling

Disney

Happiness

Wholesome happyending narratives

Avon

Respect and humility

Gaining customers’

trust in their own homes Time Warner

We move quickly, embracing change and seizing new opportunities

Fast, strategic mergers and acquisitions

Establishing values When establishing a set of values, it is important to consider how they might help bring success in the company’s core activity, as well as how they guide behaviour in attaining that success. Formulating and choosing an agreed set of company values is an important and sensitive process and many companies use a trained facilitator to help them agree on values that are right for their company. It can, however, be done in-house, in a two-stage process that initially surveys company members to achieve a “first-cut” list of values, then uses a planned exercise to reduce that to a final list of one to three agreed values. The second phase is a challenging task, requiring company members to explain and persuade others of their choices. The “ship wreck” exercise in this phase helps participants prioritise their choices in a tangible way through facilitating discussion and negotiation over final choices. “Ship wreck” exercise for formulating company values The so-called “ship wreck” method of formulating company values gets its name from the systematic jettisoning of suggested values that is required before a set of core values is chosen. The steps in this exercise are set out below. Step 1: Decide who will participate in values exercise. Limiting participation to shareholders, governance and senior management may give an optimal number of participants. However, some companies may include other staff and possibly external stakeholders whose interests are strategic to the company.

Step 2: Circulate a trial list of numerous potential values to participants. From this list each participant may choose about 10 “firstcut” values. Encourage participants to contribute their own values if not on the trial list. Allow a reasonable amount of time (ie days or weeks) for participants to think and formulate their choices and respond with their 10 chosen values. Make sure there is a full definition or description of the behaviours that demonstrate the values. Step 3: Collate and copy first-cut values. Copy each first-cut value onto a separate slip of paper. Ensure that each participant receives a full set of first-cut values on separate slips of paper. Step 4: Begin the ship wreck. In a retreat environment or comfortable, uninterrupted setting without time pressures, invite participants to view their company as a ship and to consider their participation in the exercise as a journey on unknown seas. Place the entire collection of multiple first-cut statements on the table and invite participants to choose seven statements that best represent their beliefs and ambitions for values for the company. Encourage discussion on choices and reasons for making them. Step 5: Jettison values. Invite participants to believe their ship is sailing through a perilous storm and some of the ship’s cargo must be jettisoned to save it from sinking. Each participant is required to throw one value statement overboard to save the ship. Encourage discussion on choices and reasons. Step 6: Jettison again. The storm escalates and more values must be jettisoned. Repeat the process several times, each time requiring another value to be thrown overboard. The action by a participant of physically throwing away a value helps bring reality and finality to the decision. Repetition of the process helps clarify and prioritise the choices made. Remember, strategy is all about making choices. Step 7: Consider the remaining values. When the combined number of remaining values of all participants is getting close to the three or fewer required, facilitate participant discussion to agree on the final list. If you have more than one, make sure you have agreement on the priority order, explicitly indicating the one indispensable value that can never be compromised.

The process of whittling down a large list into a core set of one to three values is a key undertaking. The examples in Figure 13.10 below illustrate the breadth of the list and the overlapping quality of many values.

Figure 13.10: Measurable Business Values

Business values may be: Quality-driven

Focusing on improvements in total quality management and stressing quality and reliability of products or services for external and internal clients

Sales-driven

Stressing the quality of products or services sold

Customer services-driven

Putting the customer first (internal or external customer)

Technology-driven

Taking advantage of new and emerging technologies to improve customer and staff engagement. Digitising the organisation to remain relevant and competitive

Driven by technological advancement

Developing state-of-the-art products (which may be more advanced than what customers currently demand)

Market-driven

Constantly surveying the market to keep in touch with trends and needs; adjusting products/services and sales strategies to compete successfully

Profit-driven (cost effectiveness)

Focusing on profitability or cost effectiveness; emphasising the bottom line

Innovation-driven

Encouraging a creative, risk-taking, entrepreneurial environment that is open to change; allowing mistakes

Business values may include: Participation

Encouraging decision making at the lowest possible level; providing ownership and responsibility for work

Open communications

Providing clear, timely, accurate information to all employees upward, downward and laterally; ensuring that openness and candour exist (ie delivering both good news and bad news in accordance with the obligation to disclose)

Employment security

Doing everything possible to maintain employment of full-time staff; guaranteeing a secure future for all appropriately contributing employees

Decentralised structure

Emphasising small independent work units, local profit/cost centres, projectorientated teams and tasks

Equal opportunities

Dealing with employees fairly; allowing everyone the same opportunities without regard to race, gender or background

Focus on future goals

Focusing on accomplishment of longterm rather than short-term goals; being prepared to invest time and resources for longer-term payback

Focus on people

Assuring the dignity, self-esteem, safety, health and welfare of all

employees; emphasising that people are important Focus on success

Ensuring that all employees feel like winners; celebrating achievements; recognising people when they do a good job

Co-operation and teamwork

Promoting mutual trust and support throughout the organisation; promoting helpfulness rather than competitiveness; helping other departments when required because all are part of the same family rather than being separate kingdoms

Ethical standards

Focusing on honesty and integrity with no compromise; ensuring that everyone understands and follows high societal and organisational ethical standards

Hard work

Encouraging everyone to stretch their limits by working as hard as possible during the 40-hour week while maintaining a work life balance

Competitiveness

Competing aggressively to ensure that the business is always number one in the market and competitors are defeated

Expertise and personal development

Aiming to maximise personal effectiveness through training and development; developing people’s skills for current and future job opportunities

Action orientation

Being proactive rather than reactive in response to problems and opportunities; being prepared to take action even if occasionally a wrong decision is made

Role clarity

Ensuring that units and individuals at all levels of the organisation understand their role, goals and method of measuring achievement and that staff know how they are performing and where their job is going

Clarity of focus

Setting and communicating to all employees the organisation’s mission (ie products, markets, scope of activities) and maintaining that focus rather than frequently switching from one emphasis to another

Job richness

Ensuring that jobs are designed and rotated, etc, so they are satisfying and meaningful for the job holders; ensuring that work is fulfilling and fun

After you identify your company’s values, display your business values statements in priority order on the wall. You will need to refer to these as you make further strategic decisions to ensure that these decisions are congruent with the values you have identified. List up to three values in order of priority and, for each value, state how it will be measured at least annually and describe the SMART (specific, measurable, achievable, realistic and time-tabled) measure that will be used to monitor its implementation (see Figure 13.11 for an example of a business values statement).

Figure 13.11: Business Values Statement Example Our Values Job richness All jobs in our company are designed so they are satisfying and meaningful for the job holders; work is fulfilling and fun as measured by annual employee surveys and company resources

committed to developing and maintaining job richness. Expertise and personal development We strive to maximise personal effectiveness through training and development as measured by our annual investment in development and the new competencies our people gain each year. Ethical standards We do not compromise our honesty and integrity; everyone understands and follows our high organisational ethical standards as measured by annual employee surveys, adherence to and development of high-quality standards and guidelines.

¶1308 Functional strategies By now you should have flip charts featuring your vision (if you elected to create one), mission, sustainable competitive advantage (SCA) and business values (see examples combined in Figure 13.12). These are the key drivers of your strategy (ie your strategic drivers or business drivers). The functional strategies follow and support the key drivers. The functional strategies are made up of a consistent pattern of policies in each functional area (ie marketing, service/product, human resources (HR), innovation, information technology (IT) and finance). The functional strategies must be consistent with and supportive of the key drivers previously identified (ie vision, mission, SCA and values).

Figure 13.12: Example of Key Drivers Combined Key Drivers Our Vision We help people work better together. Our Mission We train and consult not-for-profit organisations in the areas of governance and strategic management.

Our Sustainable Competitive Advantage We develop practical tools and “how to” methods, turning great evidenced-based theory into great practice. Our Values Job Richness All jobs in our company are designed so that they are satisfying and meaningful for the job holders; work is fulfilling and fun. Expertise and Personal Development We strive to maximise personal effectiveness through training and development. Ethical Standards We do not compromise our honesty and integrity; everyone understands and follows our high organisational ethical standards. Display the business’s key drivers on flip chart sheets on the walls so that you can refer to them as you work through the functional strategies. Use the following methodology to develop these strategies: 1. Review the key issues that face your business in each function (ie marketing, service, HR, innovation, IT and finance), noting the scope for change and the role each issue plays in supporting your SCA. Some key issues may be critical success factors (CSFs) you have already identified (but did not select) in the SCA exercise. 2. Identify the priorities for change. 3. Develop the key policy (or policies) for each function, stating how each will be measured. Figures 13.13, 13.17, 13.18, 13.19, 13.20 and 13.21 provide useful prompts for each functional area to guide the process of creating policies.

¶1309 Marketing strategy The first functional area, marketing, focuses on creating demand for your services/products and ensuring that you satisfy that demand or (ideally) exceed customer expectations. The market can be defined as all actual and potential customers for your services/products. A market segment is a subset of the market with uniform customer expectations (eg business travellers make up a segment of the wider travellers’ market). Segmenting your markets enables development of separate targeted marketing strategies for each segment to more closely match those customers’ expectations. Guide to developing the marketing strategy Step 1: First, review the key marketing issues facing your business, noting the scope for change and the role each issue plays in supporting your sustainable competitive advantage (SCA) in a rapidly changing digital world. Using the Marketing Issues Prompts List below (Figure 13.13) as a guide, brainstorm the specific major change opportunities for each issue. The prompts lists for each functional strategy are guides only, not exhaustive or exclusive lists. They are intended to remind you of common business issues in each functional area. Feel free to add your own issues or critical success factors (CSFs) that you may have already identified. The key focus of marketing is the relationship between the company and its customers. The marketing strategy is the pattern of decisions (ie policies) required to develop (or break) the links between the business and its customers in pursuit of the SCA. Increasingly customers are using technology to make purchase decisions as well as to transact in fast and efficient ways. Customer expectations of high quality, effective and efficient online transaction is changing rapidly. The marketing strategy is the first prime-moving strategy in the business’s strategic plan because of its principal role in identifying

changing markets, in anticipating customer requirements and formulating those into product specifications and marketing decisions. The SCA is arguably the most powerful marketing decision the company will develop. The overall business strategy combines the various functional strategies (ie marketing, service/product, HR, innovation, IT and finance), which should all contain consistent policies and decisions supporting the company’s mission, vision and values.

Figure 13.13: Marketing Issues Prompts List Marketing Issues Prompts List What demands do the vision, mission and SCA make on the marketing strategy? Do you have processes for continuously monitoring and updating your competitor appraisal information? For example: •

How much market share do you have?

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How much market share does each competitor have?

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What segments are your competitors marketing to?

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What are they offering?

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How regularly do they change their offers?

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The effects of digital disruption in the markets you operate in?

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The extent to which technology presents new or emerging markets?

In what ways are leaders in your markets using social, mobile, analytics, cloud and the internet of things to drive innovation and competition? Do you regularly monitor customers’ needs and preferences? Does your monitoring indicate when preferences become

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needs? Do you predict and forecast these changes and revise your strategies to suit? To what extent is technology impacting your traditional markets and changing customer buying patterns? Do you monitor the frequency of customer complaints (ie whether complaints are increasing, decreasing or remaining constant)? What is the average size of contract/fee compared with your competitors (eg are you getting the large contracts or the smaller ones in the market and why)? Do your methods of monitoring customer perceptions provide adequate data for informed decision making? What in-house or external resources do you use to collect data (eg structured surveys, face-to-face or telephone contact, questionnaires, informal feedback from the sales team)? Do you have sufficient up-to-date market analysis? Are you monitoring the wider industry environment and its effect on your products/services? How do you ensure that your products/services keep pace with changing customer expectations? How do you create demand for your services/products? Is the actual profit contribution known for each service/product you offer? Purchasing strategy: Do you view suppliers as competitors or partners? Do you involve them in the development of the services offered? What is the role of purchasing? Do you involve suppliers in helping you to improve your products/services? How are communication channels with your suppliers structured? Product/service specification: How do you differentiate your products to compete successfully? Do you appeal to pricesensitive customers to win market share? Do you focus on a target/niche market? (For more information about

product/service specification as an analysis tool, see the work of Professor Michael Porter.) Pricing strategy: How do you price your services/products? Do you adopt a cost-plus approach, rely on supply and demand, match the prices of your competitors, base your prices on the perceived value to customers, set the price low to attract customers then raise the price, etc? Promotion issues: Do you promote your services/products by advertising, personal selling, sales promotions, publicity, merchandising? Quality: How do you assure the quality of your customer service and delivery of products/services? Have you appropriately and clearly specified customer expectations? How do you continuously improve your process capability and stability? To what extent is business process improvement part of your IT strategy? Have you documented and monitored the procedures for taking corrective action when a problem is identified? How is this reported? Who is responsible? Does your marketing strategy get the right products to the right people at the right price with the right communication and promotion (ie the four Ps of marketing)? Have you identified and segmented your markets to enable targeted marketing? How does your marketing, both internal and external, reflect your SCA (eg if your SCA is your customer service, how does your marketing actually demonstrate the advantage you offer over your competitors)? Which of the following distribution (competitive) strategies do you follow: •

differentiated (ie narrow coverage, exclusive outlets,

selective locations) •

low cost (ie wide coverage, mass-market outlets, many locations), or

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target market focus (ie narrow coverage, specialised outlet type, few locations)?

What determines your pricing structure (eg list prices, discounts, allowances, payment period, credit terms)? Do you maintain current break-even analysis? Monitoring customers’ expectations and perceptions is crucial to an organisation’s marketing strategy. If your business does not regularly monitor customers’ expectations for its services/products and their experiences and perceptions of those services/products, you can record this as an opportunity to change your marketing research on the Major Change Opportunity Form below (Figure 13.14). Business decisions should be based on data, and customer feedback is some of the most powerful data available to a business. Use the major change opportunity column in Figure 13.14 to record how and how often your organisation will monitor customers’ expectations, experiences and perceptions of its products/services. As you will use Figure 13.14 to list the key issues and major change opportunities (MCOs) for each functional strategy area (ie marketing, service/product, HR, innovation, IT and finance), make at least six copies for each participant for use throughout the strategic planning exercise.

Figure 13.14: Major Change Opportunity Form Major Change Opportunity Form Notes: 1. Add extra rows to this form as necessary. 2. Use the key issue number (eg MCO 1) to identify the MCOs on

the Key Issues Assessment Chart in step 2. Key issues

Major change opportunity (MCO)

Key issue #

(eg monitoring customer perceptions of service)

(eg survey customers after every service experience is completed)

(eg MCO 1)

Continue working through the marketing issues prompts listed in Figure 13.13, adding those most important to your business to the list of MCOs in Figure 13.14. Be sure to review your CSFs list (from the SCA exercise) and include any that are key marketing issues and MCOs. Step 2: Using the Key Issues Assessment Chart below (Figure 13.15), identify the priorities for change. You will use Figure 13.15 to assess the MCOs for each functional strategy area (ie marketing, service/product, HR, innovation, IT and finance), so make at least six copies for each participant for use throughout this planning exercise.

Figure 13.15: Key Issues Assessment Chart 1

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Using the numbers you assigned to each MCO in the previous step (in Figure 13.14), rank and mark each MCO on the Key Issues Assessment Chart (Figure 13.15) using the criteria of “Opportunity for improvement” (vertical axis) and “Ability to support the sustainable competitive advantage” (horizontal axis). For example, you might rank your first MCO (numbered “MCO 1”) as 3 (on a 0–4 scale) for its ability to support the SCA and as 2 for its opportunity for improvement. You would then place the figure “MCO 1” on the chart at the point where 3 on the horizontal axis meets 2 on the vertical axis. Recording your MCOs graphically like this enables you to develop policies that may result in big improvements to the products and services you currently offer. This process will also help you develop policies that are consistent with and supportive of the SCA you have identified as the lynchpin of your business strategy. Step 3: Repeat step 2 for each MCO you identified in step 1 until you have them all rated and marked on the Key Issues Assessment Chart (Figure 13.15). Step 4: Focus on the top-rated opportunities for change (ie the issues you rated the highest to the right in the upper right quadrant). Starting

with the highest rated, list each one in a policy statement format (eg “We will survey our customers at least annually to determine their perceptions of our services/products”). Select at least one issue if you are a small entity, increasing in number in proportion to the size, staffing and resources you have available to implement these policies but do not select more than seven issues.

Figure 13.16: Key Marketing Policies

We will survey our customers to determine their perceptions of our services/products … as measured by timely completion of annual customer survey … We will … as measured by … Step 5: When you have written the top-rated issue(s) in policy format, add a statement that explains how (and when) each will be measured. The second part of every policy statement must be the commitment as to how and when you will monitor progress towards each objective. The “as measured by” statement is as important as the policy itself. Outline the measure you will use to evaluate your progress towards achieving this objective and when or how often it will be measured. All measures in the strategic plan should be in the SMART format (ie specific, measurable, achievable, realistic and time-tabled). Transfer all policies and measures to the Board Strategy Monitoring Guide (Figure 13.22), which the board reviews at every meeting. This ensures that the directors who govern the organisation regard the strategy and progress towards achieving it as their highest priority. Step 6: Display the Key Marketing Policies (Figure 13.16) on a flip chart for constant reference throughout this planning exercise alongside the key business drivers you have identified in Figure 13.12.

¶1310 Remaining functional strategies Use the six steps outlined in ¶1309 to identify, rate and develop policies for the remaining functional strategic areas: • service/product • human resources (HR) • innovation • information technology (IT), and • finance. Key issues prompts lists for each area are provided to guide you through the process and to stimulate thinking. It is advisable to do the finance strategy last. This ensures that you make the correct decisions about other strategy areas first and then match your financial resources to your strategy. Making decisions about service/product, HR, innovation and IT on the basis of what you can afford restricts your thinking. It is better to decide what should be done, then figure out how you can afford to implement the correct decisions. You may be creative and figure out ways to do the right things for less. Do not let the budget dictate your strategy. Use the same steps to develop your strategy in these remaining areas as you used for the marketing strategy (see ¶1309). The six-step process is summarised below. Step 1: Review the key issues facing your business, noting the scope for change and the role each issue plays in supporting your sustainable competitive advantage (SCA). Step 2: Using the Key Issues Assessment Chart (Figure 13.15), identify the priorities for change. Step 3: Repeat step 2 for each major change opportunity until you have them all rated and marked on the Key Issues Assessment Chart (Figure 13.15).

Step 4: Focus on the top-rated opportunities and combine them in a policy statement format. Step 5: After you have selected the top-rated issues and have written them in a policy format, add a statement explaining how (and when) each will be measured. Use the format in the Key Marketing Policies document (Figure 13.16) for these policy statements. Step 6: Display the policies for each area on a flip chart for constant reference throughout this planning exercise. Service/product strategy Use the six steps outlined in ¶1309 to identify, rate and develop policies for your service/product strategy. Work through the questions in Figure 13.17 below to identify what is required to progressively improve your services/products to create and sustain the competitive advantage. Follow the format used for the Key Marketing Policies (Figure 13.16) to create a Key Service Policies document. Service is the other prime-moving strategy besides marketing. These two strategies (ie marketing and service) are called the prime-moving strategies because of their principal role in moving the business towards its goals. The other four functional strategies (HR, innovation, IT and finance) are called the enabling strategies because their role is to support or enable the prime-moving strategies to create the winning competitive difference.

Figure 13.17: Service Issues Prompts List Service Issues Prompts List How focused are the services you offer? Do you offer a concise, manageable, limited set of services that all employees can recall? Do you have service proliferation resulting in confusion, delays or additional costs? Does every employee know how he or she can contribute to identification of service problems and solution of these problems?

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Is there a positive attitude to service improvement and change? Are the internal and external service attitudes and values the same? Does everyone understand that they serve a customer whether that customer is internal, external or both? Are all process (service) outputs specified? Is quality defined in terms of customer perceptions? Do you use statistical thinking and methods to manage and reduce undesirable variation (ie errors)? Are all employees continuously involved in improvement of the processes? Have you specified lead time to deliver? Do you monitor on-time delivery? How does your service delivery, both internal and external, reflect your sustainable competitive advantage (SCA)? What is the biggest challenge your service delivery faces in supporting the SCA in the next few years? Is customer engagement and service delivery front and centre of your digital vision and information and technology strategy? Is online management and employee performance support — systems products and processes — a key aspect of your improvement planning and strategic investment planning? What aspects of your service delivery most urgently need to change? What key service performance measures are associated with these required changes? Which of the following issues will be most critical for meeting market demands: •

Timeliness

•

Capacity

•

Information and technology systems

•

Scope of activities (ie in-house versus outsourced)

•

Quality

•

Research

•

Technical information

•

Monitoring?

Human resources strategy Use the six steps outlined in ¶1309 to identify, rate and develop policies for your human resources (HR) strategy. Work through the questions in Figure 13.18 below to identify the HR issues that need to be addressed if the business is to achieve its strategic plan. Be sure to examine the values statements and ask what you are doing (from the HR perspective) to achieve and support those. Follow the format used for the Key Marketing Policies (Figure 13.16) to create a Key Human Resources Policies document.

Figure 13.18: Human Resources Issues Prompts List Human Resources Issues Prompts List Is the culture of the organisation, as perceived by the employees, how you want it to be? Do you have evidence to support this (eg staff surveys, exit interviews)? How are the organisation’s values put into operation? What should you do to support the sustainable competitive advantage (SCA)? Are employees sufficiently involved in and consulted about business process decisions? Is the organisation structured to deliver the strategy (eg is a strategy of empowering employees to make decisions supported by a structure that promotes such decision making)? Are the jobs designed with the customer in mind, with the

✓

employee in mind, from the point of view of the process or because “that’s the way it’s always been done here”? Is there adequate forecasting of skills needed to achieve the business/HR strategy? Is development of current workers planned and monitored to encourage upskilling where possible? Is succession planning documented? Do you allocate a set amount (usually a percentage of annual income or salaries) to invest in regular staff development and upskilling? Is this staff development monitored and reported? Are there documented, standardised procedures to ensure fair, transparent and robust selection of employees? Do you measure the full cost of recruitment and the cost of turnover, including loss of productivity (ie opportunity costs)? Does the performance appraisal system separate pay from performance? The reward system (ie remuneration system) is the most visible indicator to employees of management’s commitment to fair and equitable employment practices. •

Is the remuneration policy reflected in the reward system?

•

Are bonuses organisational (ie based on team effort and culture) or individual (ie based on individual effort)?

•

Do the same criteria apply throughout the organisation?

Are measures to control health and safety hazards monitored and addressed? Is there a commitment to work-life balance for all employees? Does the organisation strive to offer benefits that are highly valued by employees but cost the organisation little (eg health insurance and life insurance policies available at discount rates to companies)? Do the HR and IT systems accurately capture the following

information: •

payroll/remuneration

•

leave records

•

management reports

•

training records

•

qualifications alerts

•

performance records

•

personal data, and

•

recruitment statistics?

Innovation strategy Use the six steps outlined in ¶1309 to identify, rate and develop policies for your innovation strategy. Work through the questions in Figure 13.19 below to identify the innovation issues that need to be addressed if the business is to achieve its strategic plan. Follow the format used for the Key Marketing Policies (Figure 13.16) to create a Key Innovation Policies document. Innovation strategy is the pattern of policy decisions directed towards product (ie goods and services) and process improvement in pursuit of the SCA. Businesses need to replace or rejuvenate mature products and processes and strive to create a competitive advantage that is difficult to copy. Service innovation involves identifying and emphasising that something “extra” that differentiates a company’s service from that of its competitors. This could be an enhancement of a traditional service or development of a new service that better satisfies customers’ needs. Process innovation involves identifying improved ways of adding value to the service so that process capability continually matches or

exceeds customer expectations. If you are not planning to innovate, you are planning to stagnate!

Figure 13.19: Innovation Issues Prompts List Innovation Issues Prompts List Which innovation options do you support with budgeted funds: •

research and development

•

imitation (eg reverse engineering)

•

purchasing or licensing of any innovative improvement, or

•

continuous improvement?

•

using emerging technology in customer engagement and new online markets?

How do you allocate resources to ensure that innovation is supported: •

by fixed percentage of revenue

•

by specific organisational objective, or

•

by reference to competition?

What methods of idea generation have you embedded into your culture and resource allocation to ensure appropriate input: •

brainstorming

•

needs analysis

•

product attribute analysis, or

•

reverse engineering?

What evaluation criteria have you explicitly promulgated throughout the business to ensure that new ideas do not die from lack of fair evaluation? Do you assess new ideas in terms of:

✓

•

customer/market needs

•

internal capabilities

•

ability to support or enhance the sustainable competitive advantage, or

•

stakeholder online engagement?

•

Do you identify a champion to support implementation of innovative ideas with drive and enthusiasm?

•

Do you have a system of senior management sponsorship for new ideas?

•

Have you incorporated support for development activities within your systems (ie do you allow time and resources for development activities that may not yield an immediate payoff)?

•

Does your board have information technology capability?

Which traditional innovation performance measures or targets do you use and which should you use: •

number of product suggestions received

•

number of suggestions implemented

•

new product development lead time

•

frequency of new product launches

•

frequency of existing product “facelifts”

•

number of process suggestions received

•

number of process suggestions implemented

•

reduced cost of business process/increased user satisfaction (customers & staff)

•

improvement in market leadership or competitive positioning, or

•

technology security risk reduction?

Information technology strategy Use the six steps outlined in ¶1309 to identify, rate and develop policies for your information technology (IT) strategy. Work through the questions in Figure 13.20 below to identify the IT issues that need to be addressed if the business is to achieve its strategic plan. Follow the format used for the Key Marketing Policies (Figure 13.16) to create a Key IT Policies document. Like the HR, innovation and finance strategies, IT is an enabling strategy — it enables or supports the key business drivers and more critical marketing and service strategies to achieve their objectives. As you developed the marketing, service, HR and innovation strategies, identifying key issues and major change opportunities, you may have already identified some IT issues that need to be included in the assessment of key IT issues. Transfer any measures or monitoring that your IT systems can automate into the Information Technology Issues Prompts List. Then consider the questions in Figure 13.20 below which may help identify major change opportunities.

Figure 13.20: Information Technology Issues Prompts List Information Technology Issues Prompts List What new or emerging technologies are likely to impact your industry or business model in the short to medium term (think industry digital disruption such as Uber or AirBnB)? Does your organisation have a digital vision that forms part of your sustainable competitive advantage (SCA)? Are your business and information technology (IT) strategies one in the same document? Is your business strategy fully enabled by a comprehensive information and technology strategy that makes prioritised, strategic use of social, mobile, analytics, cloud

✓

and the internet of things? What is the current level of IT maturity and IT governance maturity in your organisation? Does the board have a strategy-matching competency set? Does your board have the level of IT capability required to meet duty of care responsibilities relating to information and technology governance? What does your IT strategy need to do to support your SCA? What IT challenges face your organisation if it is to maintain its SCA over the next few years? Do you have a clear understanding of the existing IT systems that enable/support your business systems and processes? To what extent do these systems and processes link to form a cohesive business enabling IT architecture? What are the organisation’s most difficult IT challenges? What IT performance characteristics most urgently need to change from now on? What measures will you use to assess key IT performance associated with these changes? Do you have a clear understanding of your business processes throughout the value chain (ie the process by which a business converts raw materials into finished products or services and makes explicit the value added at each stage)? Are there opportunities to improve data flow, data integrity, data security or IT functionality that will directly contribute to achieving your SCA, the CSFs you have identified, your business values or the key policies identified thus far in the overall strategy? Which of the IT opportunities identified above will provide the greatest improvement or contribution to achieving your SCA? What are the relative estimated costs and implementation risks

(also a cost) of the opportunities identified above? How do you prioritise these in relation to IT opportunity and risk? Build a prioritised “roadmap” of the opportunities identified above, making clear links between each opportunity and the specific SCA, values, CSFs and key policies it supports. Take into account risk and investment capacity. Is the organisation’s existing IT capability aligned with business requirements? Identify IT cost reduction opportunities. Does each IT project (eg application or system upgrade) support achievement of your SCA? Finance strategy Use the six steps outlined in ¶1309 to identify, rate and develop policies for your finance strategy. Work through the questions in Figure 13.21 below to identify the finance issues that need to be addressed if the business is to achieve its strategic plan. Follow the format used for the Key Marketing Policies (Figure 13.16) to create a Key Finance Policies document. The finance strategy is the pattern of policy decisions needed to maximise long-term growth (usually through profits) generated by the business’s overall investment in pursuing its SCA. Once you have reviewed and collated all the key drivers (including the methods for measuring your progress towards achieving them) and all the policies for each strategic function (ie marketing, service/product, HR, innovation and IT), quantify the financial requirements for these and any other justifiable projects or initiatives in the strategic plan. Next, discuss and agree on the appropriate equity and debt financing with your financial advisers. This will enable the board to determine (ie set a policy) the relative proportions of long-term and short-term debt and to obtain (and monitor) the appropriate sources of finance to best meet your business needs.

You can improve your financial management by reviewing and establishing your financial policies.

Figure 13.21: Finance Issues Prompts List Finance Issues Prompts List Can you identify and improve the following items in cash flow management: •

timely and effective debt collection

•

appropriate levels of inventory

•

timely and accurate forward projections

•

smoothing of irregular commitments

•

assessment of short-term requirements

•

confirmed cash flow ability to service debt

•

inclusion in product costing of correct allocation of overhead costs, and

•

use of separate, appropriate, activity-based costing systems for products, inventory valuation, operational control and improvement?

Do you need and have performance measures for profitability, liquidity, market value, efficiency and financial structure? Have you identified financial stakeholders (eg shareholders, beneficiaries or members, employees, financiers, suppliers, customers, government agencies, non-governmental organisations)? Have you identified the particular performance information each group of stakeholders values and uses to shape its attitudes towards the business? When you appraise the “value” of projects, do you ignore the intangible and strategic benefits of initiatives? Can you quantify

✓

these and figure out how to gather data for better quantification in the future? Can you assess the value of long-term competitive advantage and degree of fit of all the functional strategies? Do you ignore the time value of money and uneven annual costs and savings? Do you use financial software models with sound assumptions? Which of the following traditional performance measures and targets do you use? Which should you use? •

return on investment (ROI)

•

return on sales

•

return on equity

•

sales growth

•

gross profit growth

•

net profit growth

•

current ratio

•

quick ratio

•

price to earnings ratio

•

asset turnover

•

inventory turnover

•

average collection period

•

debt equity ratio

•

debt ratio, or

•

other?

¶1311 Measuring, monitoring and reviewing the strategy

(all policies) When you have completed the key business drivers (ie vision, mission, sustainable competitive advantage (SCA) and values) and the functional strategies (ie marketing, service/product, human resources (HR), information technology (IT), innovation and finance), you will have a first pass at a comprehensive business strategy. With each subsequent review (an annual review is advisable), you can add more issues and analysis tools that recognise the greater complexity of your business and can offer greater insights and fine tuning of your strategy.

¶1312 Implementing the strategy Combine all the templates and charts into one short document (the strategic plan) to share with management and staff. Go through the strategy starting with the key drivers, explaining the purpose for each and how you will measure and monitor implementation. Go through the policies and measures in each area. Display the key drivers at every organisational meeting and refer to them as you share progress towards achieving them. Board Strategy Monitoring Guide When you have completed your strategic plan, make sure you retain all the work papers used in its development for reference as you implement, monitor, review and revise the strategy. Transfer all the actions, measures and due dates from the strategic plan to the organisation’s annual business plan so that inconsistencies, errors or omissions can be identified and addressed. The strategic plan and the annual business plan should be congruent, with annual business targets linked and contributing to strategic goals. To help the board monitor the strategic plan, a Board Strategy Monitoring Guide (Figure 13.22) summarises expected actions and deadlines identified in the strategic plan. The board may incorporate these items (ie actions and deadlines) into its Board Annual Work Plan or refer to both the work plan and the monitoring guide when creating

the monthly meeting Agendas.

Figure 13.22: Board Strategy Monitoring Guide Board Strategy Monitoring Guide Key Drivers and Person Time Policies Measures Implementation/Action Responsible Frame

Importance of strategy for business success

Strategic planning gets a bad name when the board and management spend valuable time developing a plan, only to ignore it until the annual review. Make sure the key business drivers you have identified for your organisation (ie vision, mission, sustainable competitive advantage and values), along with supporting policies and measures, become the basis for your business plans, organisational reporting

and board work plan. Assign people to be responsible for implementing and managing each driver and policy. Remember, what gets measured, gets done. Follow the steps outlined in this chapter to prepare a basic strategic plan, which can be enhanced each time it is reviewed. Remember to retain the same fundamental structure of your strategic plan to maintain consistency. With an understanding of strategy and how it can help your business, and a comprehensive strategic plan, your business will be better equipped to operate in any competitive environment.

Chapter 14: DIRECTING IN A DIGITAL ERA: BUILDING DIGITAL CAPABILITY ACROSS THE BOARD Editorial information

Elizabeth Valentine

¶1401 Background — we live in a digital word that affects all organisations and industries Our world is globally connected, digitised and mobilised. Technology and digitisation are disrupting industries that were once very stable and creating whole new business models (think Uber1 and Airbnb2). Cycle times are significantly shortening, and competitive products are being developed, often at a fraction of the original cost (think digital printing in everything from whole houses to limb prosthetics). Digital change is affecting all types and sizes of organisation — public, private and not-for-profit — across all industries, with no exceptions. Footnotes 1

UBER is a United States-based company that started in 2009. It now has operations in countries around the world.

UBER is a smartphone application for ridesharing that precalculates the fare, estimates the time of arrival, as well as offers the option to split the cost with additional riders; and, charges a credit or debit card when the ride is complete. UBER has significantly disrupted the profits of the taxi and limousine industries. Uber’s 2015 market capitalisation was estimated at US$40b. 2

Airbnb was founded in 2008 in San Francisco, California. It is a trusted community marketplace for people to list, discover, and book unique accommodation of all types, around the world online or from a mobile phone or tablet. Airbnb is an easy way for people to monetise their extra space and showcase it to an audience of millions. More recently AirBnB has entered the corporate traveller market. AirBnB’s market value in 2015 was estimated at US$24b, second only to the Hilton Chain.

¶1402 The problem The problem is there is a skill shortage at the top. Your organisation does not need to be a multinational for capable Governance of Enterprise Information and Technology (GEIT) to be a requirement in your board. And you are not alone. Right around the world, directors vary significantly in their personal competency and collective capability to provide effective information and technology governance oversight and digital leadership. Strong Information and Technology (IT) knowledge, skills and experience within the board and management increases opportunities and can improve bottom line results. On the flip side, lack of capability significantly increases the board and management’s individual and collective risk of not meeting their duty of care responsibilities. Consider this: Think about the impact made by digital change on your particular technical skillset — legal, finance, marketing, people

and performance, operations, or engineering. Digital change is also affecting every technical discipline and occupation, with no exceptions.

¶1403 What are we talking about — basic terms demystified Information and technology governance, opportunity and risk is a capability that now needs to exist at all levels, including the board and non-IT senior executives. Technology governance covers oversight of the hardware and the software to keep your business running. Robotics and other types of industry-specific computing are not covered. A quick overview will help clarify why boards and management need to have a good basic understanding of technology to better identify risks and opportunities. Information governance covers how the organisation goes about storing, accessing and securing customer, employee and supplier information. For example, names, addresses, credit card details, security codes and other personal details. It also covers your business information: finance, people, marketing, intellectual property and any other information you keep about your business, especially if some or all of it is kept electronically. Electronic information is what hackers are very interested in. Hackers gain illegal access to company information because the board and management have not overseen the information and technology risk competently and holistically. More on this soon. Hardware refers to physical business technology components that you can see and touch. These include computers, laptops, servers and mobile hand-held devices (such as smart phones, mouse and keyboard). Your organisation might own or lease these devices, or you or your employees might bring your own device into the workplace (BYOD). Software refers to the program instructions your device reads to perform tasks or operations. Software is categorised according to what it is designed to accomplish. There are two main types of

software: systems software and applications software. Systems software includes the programs that manage the computer itself, such as the operating system (eg Microsoft, Apple or Linux) and how files are electronically managed. The operating system manages the computer hardware resources in addition to applications and data. Applications software, or simply apps, are often called productivity programs or user programs because they enable the user to complete tasks. Tasks can include creating documents, spreadsheets, databases and publications, and doing online research, sending emails, designing graphics, running businesses, or playing games. Application software is specific to the task it is designed for and can be as simple as a calculator application or as complex as Customer Relationship Management (CRM) software or financial management applications, such as Xero or Mind Your Own Business (MYOB). As a board or as management, you will be accountable for hardware, software and applications, irrespective of whether your organisation owns, leases or buys them in as a cloud service from an external supplier. Figure 14.1 illustrates the main areas of technology used in organisations today. Consider this: A cyber security attack or “hack” is seldom the main problem. Rather information security, also known as cyber security, needs to be thought of as a blend of information and technology security. All organisations, irrespective of size (ie large or small) or type (ie public, private or not-for-profit), are vulnerable. Check out the seven areas of risk your board and executive need to oversee, in Figure 14.2.

¶1404 The Board’s role in information and technology governance All-round knowledge and insights must include the opportunities and risks of current S.M.A.C.T technologies: Social, Mobile, Analytics, Cloud and The internet of Things, shown in Figure 14.1. This figure also introduces seven areas of information and technology risk. Figure 14.1: Technologies and Risk — Social, mobile, analytics, cloud

and the internet of things

Figure 14.1 illustrates the groups of technologies that are already pervasive in business, each with the potential to increase both opportunities and risks. The seven areas of risk highlighted, are further explored in Figure 14.2.

Figure 14.2: Information and Technology risk and key considerations Area of GEIT risk

Some considerations

Comments/More info

Strategic & competitive Information and Technology risk

• Do your board and executive have a clear understanding of how technology

Understanding digital engagement is essential because a lot of digital change is customer or stakeholder driven. Digital engagement

is impacting and/or disrupting your sector, industry or similar-sized organisations? • Is there an “Uber” equivalent in your industry? • Can your board and executive identify new products/services or new ways of accessing them? • If you do not adopt new products/services or new ways of accessing them, but your competitors do, will your organisation become noncompetitive? • Are your organisation’s business and IT strategy aligned and integrated? • Does your strategy contain a comprehensive overview of all major stakeholders

can occur computer to computer (eg bank transfers); business to business (B2B) (eg auto-generated inventory control); business to customer (B2C) (eg online shopping and payments, or customer surveys); customer to customer (C2C) (eg customers on social media praise or criticize a product or service). Once you have worked through the key considerations, establish your digital vision by asking: 1. In the not-too-distant future, how could our organisation operate if we more fully digitized our customer and employee engagements, internal operations, products and /or services? 2. What capabilities would we need to shape a vision of a new future? 3. What capabilities would the board and management need to drive digital transformation? 4. What new governance and engagement practices might we need to steer the course? 5. How might business/IT department relationships need to change or improve to achieve the transformation or change?

(shareholders, supply and alliance partners, regulators, management and staff) and how technology can enhance communication and engagement with them? • How are your stakeholders and suppliers using digital technology to manage sales, orders, payments, inventory and/or distribution? • Does your organisation need to upgrade how it digitally operates to take better advantage of external digital systems and services? • Does your board have a current understanding of the strengths and weaknesses of current technological

engagement with stakeholders (and preferably each stakeholder’s views on this)? • Does your organisation have a vision of a digital future? See Appendix 1 — how to create a digital vision. Deciding to implement a technology solution to create competitive advantage can help improve the customer experience, reduce administration for frontline and back-office staff, and help improve systems and processes. With careful planning and investment, there can be savings and productivity improvements. Mobilising frontline staff usually requires investment in infrastructure (hardware and software) as well as process and policy change. Such changes require careful planning and project management. However, as a strategy, there can be significant advantages to technology-led change.

Example Strategic and competitive risk A small trucking company decided to implement an operations effectiveness strategy, after the company discovered there were a number of operating inefficiencies. Issues included poor driver scheduling; customer complaints about where their consignments were; a high cost of compliance relating to mandatory vehicle checks; and difficulties with maintenance scheduling and accident reporting. A key component of the strategy included mobilising frontline staff. iPads were

provided to all their drivers, who were trained to use them. As well as helping with better driver communications, job scheduling and consignment tracking, a mobile app was implemented to help drivers conduct their pre-scenario vehicle compliance checks, to photograph and report accidents, and request unscheduled maintenance or assistance. The mobile vehicle check app cut compliance admin costs by 75% and improved maintenance scheduling and Health and Safety compliance reporting. Staff satisfaction increased, because their paper-based administration was substantially reduced. Customer communications improved, as customers could now track their consignments electronically. Board and management reporting was also simplified and available in real time.

IT Infrastructure — the second area of risk — combines hardware and software (ie the equipment, systems, software, and services used across an organisation to help achieve the organisation’s goals and plans). However, IT infrastructure consists of more than just hardware and software. To fully understand and manage risk, there are two important categories that must be considered: infrastructure development and implementation (usually through projects), and ongoing operations after implementation. Both categories can present a wide range of risks that need to be planned for.

Figure 14.3: IT infrastructure risk and key considerations Area of GEIT risk

Key considerations

Infrastructure • IT Infrastructure consists of security & the equipment, systems, currency risk software, and services used across an organisation to help achieve the organisation’s goals and plans. Is the board able to capably oversee IT hardware and software acquisition, implementation,

Comments / more info There are two major components of Infrastructure risk. First, internal risk from systems failure, hardware, or networks. This area of risk is usually well understood as it has been the focus of IT

maintenance and secure disposal? (ISO/IEC, 2008a) • Do your current IT systems support strategy achievement/ business performance and ease of reporting? • What types, impacts and priority of IT risk are there in the current or proposed IT systems that your business depends on? • Is there a cohesive yet flexible, prioritized acrossbusiness plan to keep IT assets and core software upto-date and secure? (See case below.) • Could your organisation take advantage of cloud computing and buy in Infrastructure as a Service (IaaS) and / or Software as a Service (SaaS)? What are the risks of doing this? Can you still protect our information assets? (See case below — could IaaS/SaaS have helped?) • Has your organisation defined IT security objectives? Are they relevant to all SMACT technologies used in your business? Who is responsible for implementing them? How does the board monitor IT

management attention for decades. The second is the external risk of being connected to the Internet. These risks come from sources such as hackers, viruses, worms, and spam. (based on (Parent & Reich, 2009)) As with the November 2014 attack that paralysed Sony, a severe cyber-attack can cripple an organisation, making it impossible to deliver services to customers, suppliers, and employees. If the organisation’s defenses are breached, the risk moves into the organisation and can attack critical systems and information. To fully understand and manage risk, there are two important categories and that must be considered: infrastructure development and

security?

implementation (usually through projects, so also see project risk); and, ongoing operations after implementation.

Example Infrastructure security and currency risk The CEO of a small company had recently launched an innovative new engineering product onto the market. The company had invested in work computers at start-up three years earlier, but the CEO did not realise how quickly hardware and software goes out of date. Neither did his advisory board, which was made up of another engineer (his brother), an accountant, and a lawyer. Sales were looking promising. A family friend, with a bit of IT knowledge helped the firm out from time to time. She had suggested a costly upgrade to the company’s computers and operating system, because the operating system was now three versions behind the latest that was available. The CEO did not really understand IT or the technical information he was being provided with. He thought his business information was safe because he had passwords in place. So, he decided to defer the recommended upgrades for six months, and to reconsider the investment in the next financial year, when cash flow had improved. Two months before year-end, despite plenty of warning to IT professionals (but not directly to small companies), the company that provided the operating system ceased to provide software updates and security patches for the version of operating system used by the small engineering firm. Unfortunately, this meant that hackers were able to more easily access the intellectual property that the business was founded on. The company did not realise that their information security had been breached. The hackers who had easily gained access were privy to company information for nearly a year. It took six months before the computers and operating system was eventually updated, by which time, unbeknown to the CEO, the hackers had stolen the intellectual property and had not only registered a patent, but had developed a prototype of a competitive product. The small company’s customer information records, which the CEO kept in an unsecured spreadsheet, had also been stolen. The CEO discovered the hack and the disastrous consequences that resulted from it when a key prospective customer, who had received the product information in an email, called to ask what the CEO thought about the competitors’ product.

Figure 14.4: Information security risk Area of GEIT risk

Key considerations

Information • Who is responsible for the security risk governance of information and technology security? • Have we identified our key information assets, where they exist within our enterprise or partner technology systems? • Do we know how vulnerable the assets identified are to cyber-attack? • How regularly do we perform a risk assessment of cyber threats against key systems identified? • What controls do we have in place to protect our critical information (financially sensitive data, IP and client information) against all forms of cyber-attack? • How do we measure the effectiveness of these controls? • Do we have a security strategy in place for social media, mobile devices, cloud

Comments/more info Protect corporate data like it is 2020, not 1980! The goal is not to control employee’s devices — the goal is to support employees’ needs while protecting corporate data. “Bring Your Own Device” or BYOD — a ticking time bomb or IT’s greatest opportunity — is going to be the way of the future, with employees and managers embracing it. Find a BYOD solution that balances privacy and security needs of your organisation. Do not wait for an employee to jeopardise sensitive data. Take the lead. Whether you belong to the nearly 50 percent of organisations that

computing and employee use of personal devices (BYOD)? • Do secure off-site backups of key data exist? • Do we have formal information security policies and awareness information in place to ensure they are understood by all employees? When did we last update everyone? • How do we report on security incidents? Do we have a rapid escalation and response plan in place? Who is responsible?

have policies or not, people are using their own mobile devices at your office. Many organisations do not think they need a BYOD policy or solution because they issue corporate devices. This is a huge mistake. If apps and tools are banned on corporate devices, employees will just use them on a personal device.

Example Information security risk The 80 employees and managers at a local company had been bringing their own laptops, tablets and smart-phones to work for some time. The company has a “Bring Your Own Device or BYOD” policy. Being busy, most did not read the email about the policy. There were no briefings or training. Bob, the Marketing Manager, is preparing for the company’s largest product launch ever, and the 14-hour days at the office are taking a toll. He has embarked on an ambitious project to integrate and analyse customer data from multiple sources. To cut back the office hours and spend more time with family, he decides to start doing data analysis at home. He downloads customer data into spreadsheets, emails them to his Gmail account and downloads them to his personal Android tablet. The spreadsheets contain names, usernames, email addresses, phone numbers, physical addresses, purchasing histories and other data. The IT person is unaware that Bob has all this customer data on his tablet. Bob needs help with this project, so he divides the customer data by brand and asks four team members to each take one. Emailing reports, spreadsheets, charts, graphs and PowerPoint presentations is becoming a pain for the team. They want a way to quickly share files from their home computers, tablets and phones, but the company’s IT person is snowed under, everything takes too long and they know they will probably be reprimanded for taking data home. The

product launch is four weeks away. Bob hears about and purchases a business app that allows them to share files and data. He buys a cloud subscription for all 10 people involved in the project. They load all the spreadsheets and reports into the app, and everything, including the product launch goes well. Their data analysis leads to the most successful marketing campaign in company history. Bob organises a party at a rowdy nightclub to celebrate. The next morning, Bob wakes up feeling a bit hung-over. He realises that he has left his backpack at the bar, with his tablet in it. Because Bob never set security policies for the info sharing app on his tablet, anyone can access it. They do not need to re-enter a username or password. Potentially, someone has full access to all the company’s customer data. Bob is hoping that maybe whoever picked up the backpack just plans to wipe and sell the tablet — or maybe the person knew to look for sensitive data. Bob just changes his app password and moves on without considering the potential ramifications. Bob’s story is one possibility in an endless set of BYOD failures that involves downloading sensitive data, using rogue applications, losing devices and using them without regard to IT security policies (eg passwords). This is how BYOD can become a ticking time bomb. Rather than pretend that BYOD is not happening, it is essential to talk to employees to determine what they need from mobile devices, and to support BYOD with policy, guidelines, information and training.

Figure 14.5: Board Competency risk Area of GEIT risk

Key considerations

Competency • Does your board have the risk capability to effectively lead and govern in a digital world? • Does your organisation (all levels) have a strategymatching mix of competencies relevant to the digital future of your organisation?

Comments/more info This risk factor is about the Information and Technology knowledge of directors. The more directors know about IT, the more they can understand its impact on the organisation’s strategy and its risk

• Is strategy-related competency profiling conducted when new directors or key executives are recruited? • Does your board have a capability development plan in place? • Does the CEO have strong digital competency so that the right quality and level of information and technology information makes it into board papers, presentations and management recommendations? How do you know?

profile. The basic problem currently is that most directors are not up to speed and need to significantly update their skills. This is because technology opportunity and risk impacts all parts of the business. You may need to identify a key director or manager who will take a leadership role in bringing IT issues to the board’s attention — the same way that many boards have a Lead Director for accounting, investment, or legal matters. If there no one, the board needs to recruit for these specific skills.

¶1405 IT competency and board membership Please refer to Example: IT project risk. But first, here are some questions to test whether your board has the right competency profile to effectively govern in a digital world. • When your board receives and approves organisational plans and strategies, do they have the capability to critically review and comment on the impacts of information security, technologydriven change or investment recommendations?

• Can the board clearly articulate what digital disruptions are occurring in your sector and how these might adversely affect the organisation? • When was the last time board composition was reviewed to find out whether current members have the right skill and knowledge to evaluate IT opportunities and risks? • If the organisation was to experience a catastrophic information security breach or technological failure, could individual directors, the board and senior executives demonstrate all reasonable steps had been taken to establish appropriate duty of care and loyalty had been exercised? If your board cannot answer these questions in ways that would demonstrate competent oversight of information and technology risk and opportunity, it is probably time to buy in some advice and/or talent. Considering board and management attitudes and beliefs (culture) about IT is a pretty sure-fire way of seeing whether your organisation has the right knowledge and skills in the right place, Figure 14.6 could provide some useful insights. Figure 14.6: Example of comments indicating cultural attitudes within boards3

Board and management knowledge, skills, attitudes and beliefs about their role and IT governance, all impact the quality of IT strategy, investment, risk oversight and value creation. Beliefs and attitudes can impact opportunity assessment and decision quality, including IT project success.

Figure 14.7: IT project risk Area of GEIT risk

Key considerations

Comments/more info

IT project risk

Does your board: • Retain oversight of all phases of key technology project life-cycles from inception to measuring postimplementation value?

Almost every business or government person can tell you about an IT project that did not deliver, went over time and over budget, or

• Ensure that readily available operational IT governance frameworks (eg Cobit5, ITIL, TOGAF1) form an integral part of the organisation’s business planning, performance monitoring and reporting (including board reporting)?

failed completely. Project risk management includes the processes concerned with identifying, analysing and responding to project risk. It includes maximising the results of positive events and minimising the consequences of adverse events.

Example IT project risk A small membership organisation decided to invest in a well-recognised Customer Relationship Management (CRM) system, so that they could keep better track of their customer information and improve the ways in which the organisation engaged with its members. The person in charge of business services and operations was incredibly busy, as the organisation was growing steadily. They did not have a dedicated IT person. The board and the CEO had identified the security of their membership database as being at risk. There were also growing member and staff complaints about their out-of-date membership information and how difficult it was to update. Without bringing in outside advice to properly analyse the issues a CRM might solve, the Operations Manager hastily put together a request for proposal (RFP), and the organisation decided to go ahead with the project. Prospective consultants were screened and one was chosen. A contract was put in place. Trouble was, unbeknown to the board or the CEO, there were avoidable problems from the outset. There were omissions in the project scope. No one — the board, the CEO, or the Operations Manager — had any in-depth IT expertise. None had the right level of knowledge or skills to critically review the RFP, the IT-related content of the contract, or the project plan put together by the consultants. This

lack of capability caught them out from the start. First, the organisation’s processes needed review and significant change to work with the new CRM. This requirement created an eight weeks’ delay right from the start of the implementation. No one had thought to put in place an associated project to update and clean up the membership database, resulting in pre-project, unbudgeted and out-of-scope consulting and staffing costs. Second, the organisation had chosen to purchase a cloud-based CRM that required the latest version of the Microsoft Operating System to be installed and high speed broadband connection to enable the system to work optimally. This meant that, for the project to go ahead, the need for significant capital expenditure on new computers and laptops for 60% of the staff. While the external IT consultants had correctly identified these issues and dependencies in their original proposal and in the project plan signed off by the CEO, the costs of an operating system upgrade were significant. The organisation’s computer hardware was an average of 2.5 years old and not powerful enough to accommodate the Operating System upgrade. Faced with significant time and cost overruns, the board met to see whether they could afford to continue the project in the current financial year, and what the risks of cancelling were. Disgruntled by the whole chain of events, and feeling overwhelmed and un-supported, the Operations Manager resigned, adding to growing concerns about how the organisation would manage without him, as he was one of the few people who knew how their aging systems worked.

Figure 14.8: Business continuity risk Area of GEIT risk

Key considerations

Comments/more info

Business continuity risk

• Does your business continuity plan and disaster recovery plan cover all seven areas of Information and Technology risk? • What information and/or technology assets are at the highest risk of being affected in a crisis? • What IT assets are the most

The aim of a business continuity plan is to maintain system integrity and service quality. It should help retain competitive advantage and market share in spite of a crisis or extreme conditions. Imagine

important and need securing first? • Which assets need to have duplicates in case of an emergency? • Which IT assets and resources are absolutely critical for business to continue with minimal disruption to customers and the business? • Where and how can data be stored to ensure its safety at all times? • How will clients, customers, employees and stakeholders be informed if IT-based communications or systems are down or compromised during a disaster? • How long can the organisation be off-line without incurring substantial or unsustainable losses? • Who can perform the tasks necessary to carry on operations if a majority of the employees are unable to work? • Does the organisation have enough skilled employees to operate manual processes to minimise risk?

you are an airline or hospital and your core IT systems fail for whatever reason. Within seconds any or all of these seven areas of risk can come into play with high cost, even disastrous consequences.

Example Business continuity risk Before the Christchurch earthquake, there were two medium-sized manufacturing businesses, both in similar light engineering businesses. Both of these family businesses had been in operation for over 20 years. Both businesses were profitable. About a year earlier, at Firm A, the founder’s daughter had taken up the reigns, after completing a Bachelor of Business with a major in Information Systems. There had always been friendly relationships between the founders of the two businesses. At the Christmas barbecue before the earthquake, the founder of Firm B gave his mate a friendly ribbing about how he had better watch out that the daughter did not bring in a bunch of new-fangled ways that her dad did not understand. But that is exactly what founder A had brought her in to do. Sally had been working in the business part-time since she was in her teens, and knew the business inside and out. Over the course of her first year as CEO, she had quickly worked out where their business systems and customer interactions could be digitised. With a relatively small budget, her transformation plan covered investment in new laptops for priority areas of the business and targeted investment in a customer-friendly website upgrade. The new website would support sales and service. The new hardware would accommodate cloud-based, low cost, subscription Infrastructure and Software as Services (IaaS and SaaS) to digitise operations, and to increase the use of Computer Assisted Design in product innovation. The budget also included some change-management workshops with the staff, and training for design staff. All of the networked laptops and mobile company devices used by the sales people were securely backed-up to the cloud twice a day. Within three months of project completion, the new systems and processes were already paying for themselves in happier staff and customers, increased sales and lower operating costs. Then disaster struck. As the factory at Firm A started to shake violently in the earthquake, Sally quickly slammed the lid of her laptop shut, grabbed it and dived under the desk, shouting to those nearby to do the same. At Firm B, people also dived for cover, but there was immediate, quite severe building damage. While there was no loss of life at either, Firm B found itself locked out because of the unsafe building, and facing a terrible position, including possible closure. Like many technical specialists, the owner and founder of Firm B was a great engineer, but not really interested in computers. Paper had worked just fine for him for over 20 years, and most of the policies and procedures were in the owner’s head. They had a couple of older computers in the office that the owner considered adequate for accounts and to email customers. Customer data was kept on the Office Manager’s desktop computer in a spreadsheet. None of their business processes or engineering intellectual property were digitised. There were no system or file back-ups kept away from the business. Because they could not access their premises, it was difficult to communicate with customers as well as staff, so the office manager made a list of all she could remember, and started to phone round. A week after the quake, the founder of Firm B drove past the cordoned-off building that had been his life’s work. He did not know where to start, or whether the business could ever recover. It was a different story at Firm A. Within 12 hours of the earthquake, Sally and her

senior team were able to work from the rumpus room at her home where they still had good internet and Wi-Fi. They used remote access to their cloud-based business to not only contact staff, customers and suppliers, but to access their disaster recovery plan. They had already contacted their insurance company, located possible alternative premises out near the airport and were identifying how quickly some damaged equipment could be replaced. They estimated that the manufacturing operation would take about two to three weeks to get back up to speed.

Figure 14.9: Reputational risk Area of GEIT risk

Key considerations

Reputational Crisis communications is critical risk and hould be an integral part of your plan: • How do we minimise the financial and market impacts of a crisis? • What is our overall reputation containment and imageprotection plan? • How do we make sure we control the information flow resulting from a catastrophe, especially on social media? • Who is our IT risk spokesperson (eg the Chairman or the CEO)? • Does he or she have the digital literacy and GEIT capability to speak in an information or technology crisis?

Comments/more info Reputation risk is both personal as well as organisational.

As cyber-attack and the associated reputational damage can strike

with lightning speed, traditional corporate governance approaches need to be checked for responsiveness and risk plans need to be put in place. The problem is the predominant board practice for overseeing IT risk through board papers and monthly meetings. We call this “governance by exception”, an approach that may simply be too slow when it comes to GEIT. Here’s an example of how governance by exception without parallel traditional governance and rapid response risk processes can have serious consequences.

Example A medium-sized business with a strong online sales presence as well as a chain of outlets around the top of the North Island experienced a cyber-security breach. The hack, which happened two weeks before Christmas, resulted in all customer data — including names, addresses, and credit card and security code details — being stolen. However, because the firm had no formal data security plans in place, the board and Executive Team were very slow to receive notification of the hack. In turn, the CEO and the Chairman were also slow to advise the bank and customers about what had happened. The media got hold of the story a week after the hack, claiming that nearly 60,000 customer credit card details had turned up for sale on a Northern European website. In the four weeks that followed, the Chairman and the CEO did not help matters by essentially fudging the extent of the hack in media interviews. They understated the size of the problem, and omitted to immediately tell the bank that they had in fact received a warning from their outsourced IT security firm prior to the hack, but had not responded quickly enough. The company’s once strong business reputation took a hammering from an extended run of bad press in the paper, on TV and especially on social media. The resulting reputational damage had severe and immediate consequences. Their main shareholder threatened to sue the board and the Executive Team for breach of fiduciary duty of care for neglecting to have rapid response cybersecurity plans and practices in place. The company experienced its worst holiday period sales in almost 15 years. The bank declined a loan that the firm had applied for immediately prior to the hack, and sought to recover costs associated with the fraudulent use of the stolen credit cards, because the firm had not exercised due care in securing customer card details, or in advising the bank in a timely manner.

Footnotes

Footnotes 3

(Valentine, 2015a, 2015b).

1

A simple Google search will provide information about these useful frameworks. COBIT5 is the most comprehensive, but more appropriate to larger organisations. Doing a bit of online reading about all three is useful no-cost professional development about what an IT governance framework contains.

¶1406 Practical steps to get started transforming your board Taking appropriate steps towards capable digital leadership and transformation can lead to increased performance, profits or the market value of your business, no matter what size or type of organisation, or what industry sector. Here are some practical steps a board can take. Take the first steps towards digital transformation. 1. Start the digital transformation process by conducting a simple IT maturity audit (See Appendix 2 for a checklist). This will help your organisation understand the focus and effectiveness of previous investment, and your organisation’s digital change capability. 2. Conduct an audit of current board GEIT capability using three GEIT competencies. (See Appendix 3 for these). Knowing whether you have enough of the identified GEIT knowledge, skills and experience will help identify whether you build capability through director professional development or recruit the necessary talent. Evaluate the digital capability of your Executive Team

3. Your Chief Executive’s IT capability is critical. If he or she is not tech-savvy, critical information could be filtered out of board papers. Such filtering can impact investment priority, risk responses or value creation opportunities. Equally, because technology impacts all parts of your operation, the currency of all executive’s IT knowledge should be checked and professional development needs identified. 4. If your organisation has one, review the current chief information officer (CIO) or chief technology officer (CTO) position in the organisation structure. Is enterprise technology still considered an operational cost rather than a strategic asset by the board or Chief Executive? Does the CIO or CTO report directly to the Chief Executive? Is she or he capable of functioning across the business as a strategic business partner? Does the CIO engage with and brief the board on a regular basis? Establish a digital vision for the organisation 5. Beyond alignment, technology and its governance have become integral to organisational strategy and its governance. A digital vision is not some “pie in the sky” exercise. This is where your organisational strategy and digital future come together and stay together as one. A digital vision of the future of your organisation can come from four perspectives. These depend on how technology is disrupting your industry, how much of an opportunity or threat this represents, and the priority your board and Executive Team places on these factors. 5. Decide which of these four perspectives are most important to your organisation. Typically, the focus of your digital vision will depend on your decisions about digitising: a) your operations to gain cost and productivity benefits b) your organisation’s customer (or stakeholder) experience to better access current and new markets

c) the support you give frontline staff and their managers, to improve compliance reporting, customer sales and service, communications, or training, or d) a combination of all three of these. (Also see Appendix 1 for some useful tips). 7. Use the results of 1–5 above to craft a flexible and measurable vision and put a plan in place. Make sure the plan forms part of your organisation’s board reporting. Review board governance structures and processes 8. Check that board governance structures and reporting will support the plan and are appropriate to a digital business. Incorporate digital effectiveness measures into your performance reporting. Include identified areas of risk in your risk register. 9. Review the structure and membership of board and board committees if you have any, such as an audit and risk committee. Is there at least one person with broad GEIT competency? 10. If your board and management are light on IT skills, consider establishing a technology governance advisory group to focus on digital opportunities and risks, and to develop your digital vision. An advisory group does not have the same legal accountabilities as a formal board. You may even find that people with the right information and technology governance skills from within your customer or supplier community would be part of your digital vision and GEIT advisory group for free. 11. Make sure risk and security alerts and escalation policies, systems and procedures are in place outside of normal board reporting. Know what actionable insights are required at each level of accountability including the board. Who is responsible and what circumstances trigger the escalation of IT risk alerts? Make sure your board has an emergency communication plan that includes monitoring of social media networks.

¶1407 Conclusion Information and technology offer your organisation unprecedented opportunities and risks. Increasingly, GEIT competency is necessary both for the board and for the Executive Team. Whether your organisation is small or large; public, private or not for profit, or whether your industry is not considered high-tech, IT is impacting your sector — no exceptions. There is a skill shortage in boards: GEIT capability is commonly inadequate. This capability is urgently needed across the board, including those directors who come from finance, legal, marketing, operations and HR backgrounds. Digital disruption also affects all occupations. Putting in place a vision will help ensure emergency responses will meet technology-related duty of care responsibilities. When GEITrelated forward thinking and planning is carried out at the same time that you put your business strategy and plan in place, your organisation has a significantly increased chance of not only surviving, but thriving into the future. Those organisations that do not build GEIT capability risk joining the growing list of once-leading firms left behind in the digital “cloud of smoke”. Those organisations that do will be better placed to reap the benefits and hedge against the risks of a digital world. APPENDIX 1: CREATING A DIGITAL VISION A digital vision sets the tone for the way your organisation will tell the story of your future. It is the basis of how your organisation will build your future brand and how you will relate with your customers, employees, suppliers and key stakeholders. Organisations interested in digital transformation usually take two main approaches — digitising the customer and stakeholder engagement experience, or digitising the operation. Others combine the two approaches into a vision of changing their business model. Customer and stakeholder engagement: The business drivers of

this type of digital vision centre on establishing stronger connections with all users: customers, employees, suppliers and other stakeholders. These organisations focus their digital efforts on improving understanding of the interests, needs and online behaviour of all internal and external users of their website, mobile apps and internal intranet. They focus on better use of analytics and digital channels. There are three key drivers for a user experience-driven digital vision: using digital technologies to better connect with all customers and key stakeholders, including employees; making this digital connection an integrated user experience; and using analytics and digital tools to understand user behaviour. These organisations tend to focus on user personalisation and multi-channel coherence. Improving the user experience commonly includes improving customer-related systems and processes, which may also need to be digitised to achieve a fully integrated experience. Operations effectiveness: The business drivers of this type of digital vision are commonly productivity and efficiency, or the need to integrate disparate operations. The intent is to increase system, product and process efficiency; improve decision-making quality and speed; and to foster collaboration across the various parts of the business. These firms craft a vision that is focused on operational excellence and how digital technologies and data can help the company improve. They consider using hardware and software (whether owned by you or purchased as a service) to document and improve business processes; to better capture IP; to provide better quality, more timely information to assist work performance; or to better connect information inside the business to reduce the cost of doing business and improve productivity. The combo model: Other firms combine both user experience and operation effectiveness. While some will use these two approaches in combination to improve their operations, others use the combination to embrace digital transformation. This can mean a total shift from current ways of doing business. Digital transformation is usually

motivated by either the need to innovate and compete or the need to survive. Long-term survival acknowledges change within an industry because of the rapid pace of technology change. Perhaps an app has been developed that fundamentally changes the business model of an industry. Here it is useful to think of whether your firm’s products and services have been or are about to be made redundant, or whether your business is relying on an outdated technology or way of delivering a service. Innovation and better products and services is the second combo model. Companies with this type of vision seek to use digital technologies to find and attract new customers, to extend their presence in new markets. Others use the combo model to prepare for their business for the future. Perhaps their market intelligence has identified a potentially new, disruptive technology. Consider the impact of artificial intelligent, sensing machines or the use of robots in your sector, and the next, rapidly approaching impacts of connected, intelligent smart devices. Remember, you are creating a digital vision. The goal is to marry a vision of a digital future with your strategy. Done properly you will almost certainly find that your organisation’s business strategy and objectives will need to be reviewed and adjusted at key stages of the process. Here are some suggestions: 1. Review digital trends relating to your organisation This step should ideally happen at least twice yearly and be discussed at board level. If you are small, ask your IT service supplier. If you belong to an association, they might have information. Your marketing person or frontline staff may have useful information. Make market and IT intelligence a regular talking point amongst team members, or have a regular two minute “what’s cool out there” discussion at team meetings. Report findings to the board. What you are looking for are the organisations or applications that

could seriously impact your business. For example: if you are in the energy sector, you will be looking for trends in low cost sustainable generation, Wi-Fi transmission and new sensing and battery technologies. If you are in engineering, manufacturing or building and construction, you will be looking at robotics, sensing, and digital printing. If you are in transport and logistics, you will be looking at electric vehicles, driverless vehicles, GPS tracking, digital mobile for frontline staff and stock control, and so on. Tip: Look outside into the wider environment. Search Google for trends in your industry and disruptive trends. Use search criteria such as “Top 10 trends disrupting [sector]”. You might also look outside of your own industry sector and look at similar sized organisations, or at sectors that are major suppliers to your organisation. 2. Conduct or review research (no more than two years old) into key user needs and online usage Analyse the current online behaviour of all key stakeholders — customers, employees, suppliers and stakeholders. The objective is to build a current picture of how key people are using your current website. Is it via mobile devices? How did they find your business: search engine, weblink and any other media? This information can be found by reviewing web page statistics, such as google analytics. The supplier that hosts your website can also help if you have not already got reporting set up. You need to understand what devices and technologies they are using to engage with you, what is working, and what is not; what keeps them engaged on your website; what is popular and what is not. You may wish to create profiles to describe your top five to six key audiences as typical individuals, their motivations, needs and aspirations. This coupled with your understanding of their online preferences will help you to understand how you can improve what to offer them, and how you can use technology to better engage with them. 3. Review and update organisational business objectives Circumstances might have changed since the last time your

organisation created its current strategy. 1. Conduct a strategic SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) on the business in general. Did this information consider your digital SWOTs? 2. Answer the seven sets of questions outlined in the IT risk section earlier in this chapter. 3. Using the information from steps one and two, answer: a. What are the top 10 business challenges or issues that the organisation faces? How are these prioritised? b. Where is our business already information and technology weak or vulnerable? Are there new or emerging technologies or applications threatening our business/business model/sector? c. Where is our business already information and technology strong and capable? d. How and where in the business could the use of Information and Technology help overcome identified business weaknesses and threats? e. Which digital transformation vision should we focus on: user engagement, operations effectiveness and productivity, or a combination? Why? 4. How do these findings impact our current strategy, business plan and priorities? 4. Establish digital objectives relative to the digital transformation vision chosen At this stage, this is not about opening up new channels or redesigning whole digital properties, it is about understanding how digital technology can be used to deliver value. What will your business need to stop/start/continue?

Think of the key things that digital technology can deliver (not how at this stage), think about finding and accessing information about your products and services; think about customer and employee engagement, involvement; transacting, informing, connecting, learning, tracking and tracing, servicing, sharing and/or advocating. With your knowledge of your key stakeholders’ needs and your organisational objectives, you will be able to define how you can serve the needs of both digitally, or at least how digital information and technology can contribute. 5. Develop key user scenarios across the digital landscape in line with your digital objectives What do you want your organisation or key stakeholders to do, and what do they want to do? You should have a good idea of this now, so this is the time to become channel specific. What is the best way to deliver to your digital objectives? Does the scenario rely on new digital systems and processes? What are the impacts? Will you organise work differently because part or all of a process will be digitised? Does success rely on a combination of integrated channels? Is it a mobile app? Plot the scenario that your transformation will take to realise both business and user objectives across the digital landscape. You may need to create a number of these scenario maps for different products and services, or different user groups. How do the scenario maps relate and interrelate? For example, how does your improved customer data support better front-line service and sales? 6. Review existing digital landscape and its ability to deliver to key user scenarios This should be done in conjunction with the activity above. It might be that you are already providing an adequate scenario in some respects, but how can this be refined or enhanced? 7. Review internal processes, capabilities and resources and their ability to deliver to digital objectives Do you have the change capability to deliver the transformation? Do you have the right resources — management, technical skills, finance, premises?

8. Establish a series of tactical and strategic work streams to deliver digital objectives Understand how management will maintain business as usual while involving key people in any transformation project. Define the work that will need to be done to reach your objectives. Understand the interdependencies for each, and the resources required. 9. Produce a roadmap and schedule priorities based on ROI: set measureable KPIs for each Bring it all together in a simple transformation roadmap that describes your vision, how you intend to get there, the timeline involved and the resources that will be required. Try to understand the relative importance of each major piece of work and set a measureable target against it. What specific goals are you trying to achieve? 10. Review management Key Performance Indicators (KPIs) It is essential that you keep a track on how well the digital business vision is doing. Make reporting against project outcomes, identified risk and management KPIs a feature of board reporting. Insist on rigorous analysis of your stats and analytics in order to get a picture of what is working and what is not. You may find that a small adjustment to a particular channel is all that is required to get your indicators performing. Adjust plans and KPIs as things evolve and change. 11. Review digital trends (update board reporting bi-annually): build change capability By the time you get to a particular work stream or part of the transformation project, it might be that the customer or IT landscape has changed, making your original vision and plan less effective, or even obsolete. Flexible thinking and using good quality analytics, risk assessment and reporting are essential to helping you and your organisation build digital transformation capability.

APPENDIX 2: DETERMINING IT MATURITY The strategic grid has been used by all types of organisations, large and small, to analyse and discuss the impact of information and technology systems. Working out where your business sits on the grid helps determine the impact of both existing and planned future IT systems requirements. There are four different IT environments with strategic impact. Organisations can be either passive/defensive or active/reactive and offensive in their strategic approach to IT (Nolan & McFarlan, 2005). There are also four modes, or ways of describing your firm’s position: strategic, factory, support, or turnaround. Figure 14.10 illustrates this. Organisations in support mode are least dependent on IT; those in factory mode are much more dependent on IT, but are relatively unambitious when it comes to strategic use. Firms in turnaround mode expect that new systems will transform their business; those in strategic mode require dependable systems as well as emerging technologies to maintain or advance their competitive/strategic positions. Consider this: Using the brief descriptions in Figure 14.10, where does your organisation currently sit? Where does your organisation need to be in the short to medium term? Figure 14.10: The strategic grid framework (based on Nolan & McFarlan, 2005).

While originally developed to facilitate decision making within the organisation and for reflection, this model can be used to suggest more active ways in which the board can understand enterprise information and technology and its governance. Five IT maturity indicators help identify what stage your organisation is at: beginner, planned, defined, managed and optimised (based on Van Grembergen & De Haes, 2009). Using the IT grid This section provides more detail about the grid shown in Figure 14.10. This can be used to further explore the level of IT maturity in each strategic grid mode. Board considerations are provided for each quadrant of the grid, starting with Support, followed by Factory, the Turnaround and finally Strategic. Review all tables provided on the following pages to reflect on your organisation’s current level of IT maturity and identify risk. Note down your comments/reflections. Support (Defensive) Mode Considerations Does this describe your organisation? Put a tick against any statement that is exact or close.

Figure 14.11: Support (Defensive) Mode Considerations Checklist

Characteristic

The organisation has both a relatively low need for IT reliability as well as a relatively low need to use information and technology strategically. What technology the organisation does have mainly exists to support employee activities. Apart from basics, such as email and a simple (not ecommerce) website, the organisation does not use IT to engage with customers and stakeholders. The organisation has little or no internet or social media presence, except perhaps a basic informational webpage, or a presence via a third-party supplier, such as the Yellow or White Pages, to enable potential customers to find information about the organisation online. Internal operational technologies are used for such things as financial

Sounds Risk Issues/comments like us level if this raises? now retained H/M/L

such things as financial management and stock control. These simple, often stand-alone IT systems work to primarily maintain the business. Many systems are manual or, if computerised, use simple software such as spreadsheets to manage business information. Existing IT is not networked because there is no integrated, enterprise map of IT (ie IT architecture). There is little or no customer/business impact from technology outages. Service interruptions can last for a day without serious known consequences. Customers tend not to have expectations of high tech solutions or online services. It is unlikely that the organisation has any specialist IT support on staff. Internally, IT capability is likely low. When it comes to the use of IT, the organisation is just starting out/has very basic

starting out/has very basic IT in place. If most of your ticks were in this mode, the organisation is at the beginner stage of enterprise information and technology maturity. There is emerging evidence of the need for IT, and measurement of IT effectiveness. Any measures of IT effectiveness are ad hoc. Any measurement is likely an individual effort in response to specific issues. To ascertain how to move to turnaround mode, management and the board need to ask questions and consider competency requirements such as: • How has the strategic importance of IT changed? Are we missing opportunities because of the limitations of our technology? • What are our current and potential competitors doing in the area of IT? • What technology assets do we have and how well are we managing these? • How do we use information to support our business and could we improve the way we support staff achievement, and better meet customers and stakeholders needs if we improved our orientation to business information? • Do we have the appropriate IT infrastructure and applications to exploit the development of our business and intellectual assets? Factory (Defensive) Mode Considerations Does this describe your organisation? Put a tick against any statement that is exact or close.

Figure 14.12: Factory (Defensive) Mode Considerations Checklist

Characteristic

The organisation has a high need for IT reliability, but a low need for new or emerging business technologies. The organisation is seriously impacted by unreliability and outages in their technology, which must also be fast and secure. Technology provides ready access to online, real time information which is made available, as appropriate, to board, management, staff, customers and suppliers. Stakeholder engagement is deliberate and planned, via a range of networked and mobile internet available media. Organisation’s core business systems are online. The organisation experiences immediate loss of business or increased risk, if systems

Sounds like us now

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fail even for a very short time. During systems failure or outages, a reversion to manual procedures is difficult. During systems failure or outages, there are serious impacts for service and process continuation. Depending on the industry, your organisation seeks reliability over technology innovation. The board has good awareness of leadingedge practices and IT transformations. The board and management monitor the competitive and digital disruption landscape for changes requiring a more aggressive use of IT. Because business continuity in IT operations is critical, disaster recovery plans are in place. Information and/or technology security procedures and reputation

procedures and reputation risk recovery procedures are in place, but tend to be ad hoc. Processes for IT performance monitoring, IT effectiveness and ROI review tend to be informal rather than a planned and monitored aspect of management and board discussion As well as the questions posed in support mode, management and the board also need to ask the following questions and consider competency requirements such as: • What has changed that might require contingency planning to ensure business continuity, disaster recovery and security maintenance? • Do we have in place management practices that will prevent our hardware, software and legacy applications from becoming obsolete? • Do we have adequate protection and rapid risk response systems in place against security breaches, malware and other service prevention attacks and hackers to ensure 24/7 service levels, including tested backup? If most of your ticks were in this mode, the organisation is at the planned stage of enterprise information and technology maturity. Management and the board are aware of the need to measure financial and non-financial IT results in a scorecard that includes IT usage and information effectiveness measures. Management provide IT reports to the board reflecting these measures. Linkages between results and performance drivers are generally defined but are not yet precise, documented or integrated into strategic and operational

planning processes. Turnaround (Offensive) Mode Considerations Does this describe your organisation? Put a tick against any statement that is exact or close.

Figure 14.13: Turnaround (Offensive) Mode Considerations Checklist Characteristic

The organisation is moving and changing with the process of strategic, digital transformation. A digital vision has been defined. New technology is very important and the organisation is prepared to invest heavily. Turnaround is a major shift in IT usage and IT services provision with social, cloud, analytics, sensing and mobile likely now considered in the process of redesigning the enterprise IT system (architecture). Strategic IT systems investment decisions are

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intended to achieve major efficiency and productivity gains, and user engagement/service improvements. The organisation anticipates cost reductions, and to use IT to gain a competitive edge. The organisation can tolerate some unreliability in the transition, as they know that it is a temporary situation. Customers and the business operation can withstand some outages/service interruptions of up to 12 hours without serious consequences, as core business activities remain on a batch cycle. All core business procedures are being or have been digitised. Once new systems are implemented, there is no possible reversion to old, manual systems. The stakes and risks are high and a return on investment is expected.

Board oversight is considered critical with regular oversight via board reporting and possible audit and risk committee oversight. Most firms do not spend a long time in turnaround mode; once the change is made, they move into either factory mode or strategic mode. As well as the questions and competencies required for support mode, the following should be considered: • Do we have project and change management capability in place to ensure our strategic IT development plans proceed as expected? • Does our turnaround IT strategy have post-implementation followup training, culture change and performance management initiatives in place to ensure that an improved IO culture and information usage results from our investment? • Has sufficient priority been given to risk oversight to deal with a competitive threat or to meet new potential opportunities? • Do we have processes in place that will enable us to discover and execute any strategic IT opportunities, such as brand and sales initiatives using social media? • Do we have an internet and/or social media presence to monitor customer and stakeholder feedback on our improved IT? The organisation is at the defined stage of enterprise information and technology maturity with processes such as IT and information usage scorecard measurement and reporting a regular part of management reporting. Updates are linked to the business and performance planning cycle. Strategic (Offensive) Mode Considerations Does this describe your organisation? Put a tick against any statement

that is exact or close.

Figure 14.14: Strategic (Offensive) Mode Considerations Checklist Characteristic

The organisation requires high reliability as well as access to and capability in deploying new and emerging technology. The organisation is closer to mastering the paradoxes of both maintaining the smooth day-to-day operation of the business and driving customer and stakeholder satisfaction, as well as putting a strong focus on digital transformation. Digital technologies inform not only the way they approach the marketplace but also the way they carry out daily operations. IT expenditures are prioritised and ongoing. Investment is significant, so project and system

Sounds like us now

Risk Issues/comments level if this raises? retained H/M/L

effectiveness monitoring are a priority. Full board governance oversight occurs either with the full board or via a competent IT governance committee. All seven areas of information and technology risk are understood and mitigation plans in place. A Rapid Risk Response process runs parallel to standard board reporting, with clear roles and responsibilities articulated. Not every firm wants or needs to be in this mode, some are forced into it because of disruptive technologies and competitive pressures. All of the questions and competencies requirements for support, factory and turnaround modes are relevant. It is particularly important that the board has strong GEIT capability, including in the strategic use of IT and information. This is so that the board can question and debate management thinking and recommendations to ensure the best possible outcome. The organisation is at the managed stage of enterprise information and technology maturity (Van Grembergen & De Haes, 2009) with the IT scorecard fully integrated into the strategic and operational planning and review systems of the business and IT. All aspects of performance and strategic alignment are systematically and regularly monitored with revisions and changes made on the basis of analysis and outcomes. Optimising the system

Once the move to strategic or factory mode has been successfully in place for sufficient time to collect and record effectiveness measures, IT can be assessed to determine factors relating to IT maturity are now optimised. Plans, systems, processes and performance scorecard measures are fully aligned with the business strategy and vision. There is appropriate and balanced competency at all levels with interdisciplinary understanding of the issues, priorities, and roles and responsibilities. Success is supported by ongoing professional development, and targeted recruitment is based on identified competency requirements. Long-view goals, targets and priorities for IT investment projects are set and measured through the IT scorecard. Employees are clear about where they fit and how they contribute, with individual performance plans and incentive systems linked to overall scorecard measures. Enterprise information and technology and IT governance are clearly defined in terms of roles, responsibilities, and management and enterprise governance processes. Communications are optimised for all stakeholders via a range of technologies including social media. APPENDIX 3: BOARD ENTERPRISE TECHNOLOGY GOVERNANCE COMPETENCY DESCRIPTORS A technical competency set of this type is part of the overall, wider picture of knowledge, skills and experience required for success in the role of company director. These board-specific GEIT competencies can be used in a wide variety of ways. For example, a board could use the set to evaluate current board capability. Relevant questions from each of the three competencies could be included in the next board evaluation. Competency sets can also be used to identify director professional development needs, to evaluate board membership or structure, and to recruit or develop a succession plan for new members.

Figure 14.15: Board Enterprise Technology Governance Competency Descriptors Competency 1: Direct and govern technology-enabled strategy

Definition: Direct and govern technology-enabled strategy to maximise the advantages of technology and enhance performance at all levels of the organisation. Descriptor C1-1

Knowledgeable about current and emerging digital technologies and their potential to add organisational, customer and stakeholder value.

Descriptor C1-2

Skilled in business, environmental and competitive analysis including how industry sector and similar organisations are using new and emerging technologies and information.

Descriptor C1-3

Skilled in overseeing the inclusion of current and future technologies into the organisation’s strategy, business plan development, organisational performance measures and management Key Performance Indicators.

Descriptor C1-4

Knowledgeable about the digitisation of business processes that underpin peak performance and their relationship to overall corporate governance.

Descriptor C1-5

Knowledgeable about and skilled in evaluating the level of information and technology dependency the organisation has now, and may need in the future.

Descriptor C1-6

Experienced in selecting, implementing and monitoring the effectiveness of enterprise information and technology governance mechanisms (systems and processes).

Descriptor C1-7

Able to oversee technology acquisition, implementation, maintenance and disposal to meet the board’s fiduciary, regulatory, compliance, ethical, contractual and legal obligations (based on ISO/IEC, 2008b).

Descriptor C1-8

Knows what to measure and monitor and how to interpret business technology performance data against plans and policies to derive expected benefits, and ensure strategic intent is achieved.

Competency 2: Direct and govern business technology investment and risk. Definition: Understands and uses information and data to evaluate, direct, monitor and analyse information provided by management, supply partners and advisors. Can ask probing questions and critically analyse management and external advisor responses. Can contribute to discussion to ensure that decisions about technologyrelated performance and risk oversight meet governance performance and conformance requirements. Descriptor C2-1

Understands how prioritised technology infrastructure investments to help achieve enterprise business goals and reduce risk.

Descriptor C2-2

Able to evaluate and mitigate infrastructure, information, privacy, data security and reputational risk ensuring the continued operation of the business.

Descriptor C2-3

Knows what areas of IT risk to measure, monitor and report on, and how processes and policies support the board in meeting its fiduciary responsibilities in a timely manner.

Descriptor C2-4

Demonstrates an understanding of technologies for identifying, tracking, mining and exploiting the data and information relevant to the organisation’s needs.

Descriptor C2-5

Knowledgeable about the unique issues associated with digital technology investment and digital change capability to better focus and prioritise digital transformation initiatives.

Competency 3: Direct and govern technology-enabled innovation and value creation. Definition: Understands and can provide oversight of technologyenabled product and service development, business process efficiency and stakeholder engagement. Descriptor C3-1

Provides strategic leadership of an organisational culture that champions digital business technologies, and uses data and information for decision-making and change leadership.

Descriptor C3-2

Demonstrates knowledge of the implications, costs and benefits of digital technologies such as business applications, mobile and social technologies; the cloud and outsourced services, and the internet-of-things.

Descriptor C3-3

Understands how to derive business value from technology investments, balancing risk & opportunity

Descriptor C3-4

Experienced in board-level governance oversight of large scale IT projects to ensure promised outcomes are achieved.

Descriptor C3-5

Knowledgeable about value creation through digital product, system or service development. Can provide guidance to management in considering their value-creating uses for strategic advantage.

Descriptor C3-6

Oversees technology asset life-cycles to derive expected returns.

Chapter 15: GOVERNANCE AUDIT AND BOARD EVALUATION Editorial information

Karen Martyn

¶1501 Introduction Corporate governance experts and shareholder rights activists have been advocating for years for formal evaluation of board performance as well as individual directors’ performance. Given the high level of responsibilities and powers vested in directors and boards, and the increasing need for accountability and transparency, it is only prudent for boards to measure and report on board performance, and take steps to improve it. However, before embarking on an evaluation of board performance, the board should first undertake an audit of its governance practices and policies, often referred to as the infrastructure or architecture of the board. This chapter provides step-by-step guides and templates to help a board to carry out a governance audit and then a board evaluation.

¶1502 Governance audit

A list of nine principles for corporate governance (the New Zealand principles) created by the New Zealand Securities Commission1 (now the Financial Markets Authority) provides an excellent standard for assessing an organisation’s governance basics (ie conducting a governance audit).

Figure 15.1: Principles for Corporate Governance 1.

Directors should observe and foster high ethical standards.

2.

There should be a balance of independence, skills, knowledge, experience and perspectives among directors so that the board works effectively.

3.

The board should use committees where this would enhance its effectiveness in key areas while retaining board responsibility.

4.

The board should demand integrity both in financial reporting and in the timeliness and balance of disclosures on entity affairs.

5.

The remuneration of directors and executives should be transparent, fair and reasonable.

6.

The board should regularly verify that the entity has appropriate processes that identify and manage potential and relevant risks.

7.

The board should ensure the quality and independence of the external audit process.

8.

The board should foster constructive relationships with shareholders that encourage them to engage with the entity.

9.

The board should respect the interests of stakeholders within the context of the entity’s ownership type and its fundamental purpose.

Audit before evaluation The governance audit will give your board a clear understanding of its underlying governance architecture (ie practices, policies and procedures). Ensuring that the board has adequate policies and procedures in all the basic points covered by the audit confirms that it has a sound, fair foundation for good governance. The board should be confident that it has a sound foundation for good governance before conducting the board evaluation, so that board process issues are not confused with governance procedures and policies (or lack thereof). Governance audits against the New Zealand governance principles give boards tangible tasks to improve their governance infrastructure and readiness for board evaluation. Every board should comply with the nine principles listed in Figure 15.1 or explain why they do not comply. These principles are globally accepted governance standards which aim to ensure that New Zealand entities meet internationally accepted standards for good governance. Many organisations publish the results of their audits against the New Zealand principles on their websites (in the governance disclosure section) and in their annual reports. This demonstrates to their stakeholders, shareholders, members and beneficiaries that the board is committed to transparency and accountability for its governance practices. The governance audit is only part of the picture — it demonstrates compliance with accepted standards. An audit of the board’s compliance with core directors’ duties (see Chapter 1) with explicit audit of practice against the organisation’s constitution and if applicable, shareholders’ agreement, is also part of the governance

audit. In addition, an audit against the new Health and Safety at Work governance guidelines (see Chapter 5) must be completed to ascertain compliance with these new explicit director’s duties. The board evaluation completes the picture — how the board performs (see ¶1504). Footnotes 1

Securities Commission “Corporate Governance in New Zealand: Principles and Guidelines — A Handbook for Directors, Executives and Advisers” (March 2004) (www.fma.govt.nz) at 2.

¶1503 Governance audit process When conducting the governance audit, bear in mind the following points: • Guidelines for public issuers are marked “NA” (not applicable) for not-for-profit (NFP) organisations and other non-listed entities. • For each guideline in the Governance Audit and Plan to Remedy Template, in the Findings and References column, note the name/version/date of the relevant document and the specific section that addresses the guideline and note any missing or incomplete policies or practices that require further work. At the board meeting, discuss each principle and each guideline and agree and note on the template what needs to be done, who is responsible and an achievable due date (ie a plan to remedy non-compliance with a corporate governance principle). It is best to do this at a board meeting so that the plan to remedy is also recorded in the Minutes and is integrated into the Board Annual Work Plan. Follow a similar process with the constitution and shareholders’ agreement — create a table listing each section/clause and

evidence of compliance (this may be in Minutes or policies and should refer to specific documents that confirm compliance in practice). Make sure your board goes through the constitutional requirements at a meeting so that the Minutes reflect that directors know and comply (or are planning to remedy any noncompliance even by proposing changes to the constitution and/or shareholders’ agreement) with the constitution. Chapter 1 explains that compliance with the Companies Act and the constitution are mandatory. Ignorance of the constitution is not an accepted excuse for any breach, even unintentional. Be sure to include all Recommendations, Actions and Due Date/Responsible person from the constitution audit in the Plan to Remedy. • At every board meeting, monitor progress against the Plan to Remedy. • Disclose the audit findings and plans to remedy in the governance section of your website and in the board’s annual report. This demonstrates a commitment to appropriate transparency and accountability.

Figure 15.2: Governance Audit and Plan to Remedy Template

Note: Guidelines for public issuers are marked “NA” for not-for-profit organ non-listed entities.

Principle Guidelines 1

Ethical standards Directors should observe and foster high

Findings and Comply References Recommendations

ethical standards. 1.1

The board of every entity should adopt a written code of ethics for the entity that sets out explicit expectations for ethical decision making and personal behaviour in respect of: • conflicts of interest, including any circumstances where a director may participate in board discussion and voting on matters in which he or she has a personal interest • proper use of an entity’s property and/or information, including safeguards

against insider trading in the entity’s securities • fair dealing with customers, clients, employees, suppliers, competitors, and other stakeholders • giving and receiving gifts, facilitation payments and bribes • compliance with laws and regulations, and • reporting of unethical decision making and/or behaviour. 1.2

Every code of ethics should include measures for dealing with breaches of the code.

1.3

Every entity should communicate its code of ethics to its employees and provide employee training. Whistleblowing procedures should be provided.

1.4

Every board should have a system to implement and review the entity’s code of ethics. The board should monitor adherence to the code and hold directors, executives and other personnel accountable for unethical behaviour.

1.5

Every entity should publish its code of ethics. Annual reports should include information about the steps taken to implement the

code and monitor compliance, including, as appropriate, any serious instances of unethical behaviour and the action taken. 2

Board composition and performance There should be a balance of independence, skills, knowledge, experience and perspectives among directors so that the board works effectively.

2.1

Every issuer’s board should have an appropriate balance of executive and non-executive directors, and should include directors who meet formal criteria for “independent

NA

directors”. 2.2

All directors should, except as permitted by law and disclosed to shareholders, act in the best interests of the entity, ahead of other interests.

2.3

Every board should have a formal charter that sets out the responsibilities and roles of the board and directors, including any formal delegations to management.

2.4

The chair should be formally responsible for fostering a constructive governance culture and applying appropriate governance principles among directors and

with management. 2.5

The chair of a publicly owned entity should be independent. No director of a publicly owned entity should simultaneously hold the roles of board chair and chief executive officer (or equivalent). Only in exceptional circumstances should the chief executive officer go on to become the chair.

2.6

Directors should be selected and appointed through rigorous, formal processes designed to give the board a range of relevant skills and experience.

2.7

Directors should be selected and appointed only when the board

is satisfied that they will commit the time needed to be fully effective in their role. 2.8

The board should set out in writing its specific expectations of non-executive directors (including those who are independent).

2.9

The board should allocate time and resources to encouraging directors to acquire and retain a sound understanding of their responsibilities, and this should include appropriate induction training for new appointees.

2.10

The board should have

rigorous, formal processes for evaluating its performance, along with that of board committees and individual directors. The chair should be responsible for leading these processes. 2.11

Annual reports of all entities should include information about each director, identify which directors are independent, and include information on the board’s appointment, training and evaluation processes.

3

Board committees The board should use committees where this would enhance its

effectiveness in key areas while retaining board responsibility. 3.1

Every board committee should have a clear, formal charter that sets out its role and delegated responsibilities while safeguarding the ultimate decision-making authority of the board as a whole.

3.2

Where issuers have board committees, the charter and membership of each should be published for investors.

3.3

Proceedings of committees should be reported back to the board to allow other directors to question

NA

committee members. 3.4

Each publicly owned company should establish an audit committee of the board with responsibilities to: • recommend the appointment of external auditors • oversee all aspects of the relationship between the entity and the audit firm, and • promote integrity in financial reporting. The audit committee should comprise: • all nonexecutive directors, a majority of whom are independent

• at least one director who is a chartered accountant or has another recognised form of financial expertise, and • a chair who is independent and who is not the chair of the board. 4

Reporting and disclosure The board should demand integrity both in financial reporting and in the timeliness and balance of disclosures on entity affairs.

4.1

All boards should have a rigorous process for assuring directors of the quality and integrity of entity financial reports, including their relevance,

reliability, comparability and timeliness. 4.2

Annual reports of all entities should, in addition to all information required by law, include sufficient meaningful information to enable investors and stakeholders to be well informed about the affairs of the entity.

4.3

All issuers NA should have an effective system of internal control for reliable financial reporting.

4.4

The chief executive officer, the chief financial officer (or equivalent officers) and at least one other director of publicly owned entities should

certify in the published financial reports that these comply with generally accepted accounting standards and present a true and fair view of the financial affairs of the entity. 4.5

Each listed entity NA should have a clear and robust internal process for compliance with the continuous disclosure regime. This process should include board examination of continuous disclosure issues at each board meeting.

4.6

Every entity should make readily available to interested investors and stakeholders its

code of ethics, board committee charters and other standing documents important to corporate governance. 4.7

Boards of issuers NA should report annually to investors on how the entity is implementing the principles and explain any significant departure from guidelines supporting each principle.

5

Remuneration The remuneration of directors and executives should be transparent, fair and reasonable.

5.1

The board should have a clear policy for setting remuneration of executives

(including executive directors) and non-executive directors at levels that are fair and reasonable in a competitive market for the skills, knowledge and experience required by the entity. 5.2

Publicly owned entities should disclose their remuneration policy in annual reports.

5.3

Executive (including executive director) remuneration should be clearly differentiated from nonexecutive director remuneration.

5.4

Executive (including executive director)

NA

remuneration packages should include an element that is dependent on entity and individual performance. 5.5

No nonexecutive director should receive a retirement payment unless eligibility for such payment has been agreed by shareholders and publicly disclosed during his or her term of board service.

6

Risk management The board should regularly verify that the entity has appropriate processes to identify and manage potential and relevant risks.

6.1

The board

should require the entity to operate rigorous processes for risk management and internal control. 6.2

The board should receive regular reports on the operation of risk management and internal control processes.

6.3

Boards of issuers NA should report annually to investors and stakeholders on risk identification and management and on relevant internal controls.

7

Auditors The board should ensure the quality and independence of the external audit process.

7.1

The board

should inform itself fully about the responsibilities of external auditors and be rigorous in selecting auditors on professional merit. 7.2

The board should satisfy itself that there is no relationship between the auditor and the entity or any related person that could compromise the independence of the auditor, and should require confirmation of this from the auditor.

7.3

The board should facilitate full and frank dialogue among its audit committee, the external auditors and management.

7.4

No issuer’s audit NA should be led by the same audit partner for more than five consecutive years (ie lead and engagement audit partners should be rotated from the engagement after a maximum of five years).

7.5

Boards of issuers NA should report annually to shareholders and stakeholders on the amount of fees paid to the auditors, and should differentiate between fees for audit and fees for individually identified nonaudit work (ie separating each category of nonaudit work undertaken by the auditors, and disclosing the fees payable for this).

7.6

Boards of issuers NA should explain in the annual report what non-audit work was undertaken and why this did not compromise auditor independence.

8

Shareholder relations The board should foster constructive relationships with shareholders that encourage them to engage with the entity.

8.1

Publicly owned NA entities should have clear published policies for shareholder relations and should regularly review practices, aiming to clearly communicate the goals, strategies and performance of the entity.

8.2

Publicly owned entities should maintain an upto-date website that provides:

NA

• a comprehensive description of its business and structure • a commentary on goals, strategies and performance • key corporate governance documents, and • all information released to the stock exchange (for listed entities), including reports to shareholders. 8.3

Publicly owned NA entities should encourage shareholders to take part in annual and special meetings by holding these

in locations and at times that are convenient to shareholders. 8.4

The board should facilitate questioning of external auditors by shareholders during the annual meeting.

9

Stakeholder interests The board should respect the interests of stakeholders within the context of the entity’s ownership type and its fundamental purpose.

9.1

The board should have clear policies for the entity’s relationships with significant stakeholders, bearing in mind distinctions between public, private and Crown

ownership. 9.2

The board should regularly assess compliance with these policies to ensure that conduct towards stakeholders complies with the code of ethics and the law and is within broadly accepted social, environmental and ethical norms, generally subject to the interests of shareholders.

9.3

Public sector NA entities should report annually to inform the public about their activities and performance, including how they have served the interests of their stakeholders.

¶1504 Board evaluation

Once the board has been through the governance audit and addressed the structural issues raised, it can turn its focus to identifying, agreeing and communicating criteria for good director and board performance for its particular organisation. New directors should receive an induction guide that explains what is expected of them as directors and outlines the board evaluation criteria, the frequency and timing of evaluation, and the procedures. It should also include the Board Annual Work Plan, governance policies, Constitution, Rules or Trust Deed, and other important documents. The induction guide states the expectations for the particular board, outlines board processes and procedures, and enables new directors to participate sooner with confidence rather than watching at board meetings for months and trying to discern appropriate behaviours. The guide clarifies board duties and helps prevent misunderstandings that may result when new directors model their behaviour on what they observe rather than what may be wanted or needed. Evaluation is a tool that can help increase the effectiveness of the entire board by pointing out explicitly where directors are falling short of the standards expected and thus encouraging better board performance and accountability. Before you embark on a board evaluation, you should answer several crucial questions: • What are the criteria for the evaluation? • How will the evaluation results be used? • Who will see the results? Many boards have performance standards embedded in their Board Charter, Board Annual Work Plan, board policies (eg the Board Code of Conduct), committee terms of reference, descriptions of directors’ duties and elsewhere. These should be reviewed and any such standards should be incorporated into the evaluation form. The appropriate board committee (ie Governance, Human Resources or Nomination/Remuneration Committee) should be assigned

responsibility for preparing written evaluation guidelines and keeping them up to date. These guidelines should state how often evaluations are conducted, whether the process is internally managed or uses an external facilitator, who sees the raw data, facilitates discussion and performance setting, and give details about the storage and disposal of all the collected information. The format of the board evaluation form influences how informative and useful the recipients find the feedback. Off-the-shelf surveys are less useful than customised ones because they do not reflect the unique demands of a particular organisation’s board. Generic statements that apply equally to all boards are like generic strategies — they lack the specificity required by the unique context within which each board and organisation must work. Questions specifically drawn from your board’s work plans, charter, responsibilities, values, etc, are more useful for appraising its performance and development needs. A few generic rating criteria are valuable; an attendance record at meetings, for example, only requires a record of the number of meetings a director has wholly and partially attended and the total number of meetings that were scheduled. It is best to use open-ended questions. If rating scales are used, ask the respondents to provide a specific example that illustrates why they have given the particular rating. It is of little use to tell someone that they rated a “4” (on a 1–7 scale with 7 being yes/always) unless you also tell them that this rating comes from specific observed behaviours so they can understand how the behaviour impacts on others.

¶1505 Board evaluation process The Board Evaluation Template below (Figure 15.3) can be adapted to suit your organisation and board. When adapting the template and conducting the evaluation, follow the steps below: 1. Review your entity’s governance documents (ie the charter and other policies) and add all board performance standards to the Board Evaluation Template, indicating (eg with an asterisk (*)) the ones copied from your internal policies.

2. Do an Internet search (eg using Google) for “board evaluation templates” and select any items that seem appropriate for your entity. 3. Review all the items in the evaluation template and select those which are most critical or important for your board to address. Try to reduce this list to no more than 20 items because each item may require up to 20 minutes’ discussion. You can amend the rating scale to whatever seems easiest to understand. 4. Send the evaluation forms to all board members and ask them to provide examples to illustrate the ratings they assign. These examples are important as the board can discuss them. The ratings can be used as an indicator over time as to whether improvements are made (ie the ratings from one evaluation can be compared with ratings in subsequent evaluations). 5. Arrange for someone to collate all the responses onto one form and provide an average rating as well as retaining and showing the raw data. 6. Send the collated responses to all board members. Ask them to keep the material confidential and to prepare comments and suggestions for improving the board’s performance for discussion at the next board meeting. 7. At the board meeting, respect confidentiality and encourage open, frank discussion for the sake of better understanding and better future performance. 8. Minute any decisions about better ways to work together or other suggestions and update the governance policies and procedures to reflect any changes agreed at the meeting. 9. Be sure to acknowledge everyone’s efforts to help improve the quality of the organisation’s governance. 10. Prepare a summary of the evaluation results and disclose this in

the annual report and on the website (in the governance section). 11. At the following meeting, ask board members to provide feedback on the board evaluation process — what worked and what could be improved — and document the changes so that the next evaluation reflects the lessons learned from the previous one.

Figure 15.3: Board Evaluation Template Please rate the whole board as a collective entity when conducting this evaluation Issues

Ratings

Explanations

0 = don’t know

Please give an illustration or example for each rating; suggestions to improve performance are welcome.

1 = no 2 = little/small extent 3= somewhat/sometimes/needs improvement 4 = large extent 5 = yes, excellent 1. Are the board policies being followed?

2. Does the induction procedure adequately explain everything new directors need to know? 3. Can all directors readily contribute items to the agenda? 4. Are board papers received in time to thoroughly prepare before meetings? 5. Are board papers adequately informative and appropriate? 6. Does the board follow good decision-making processes? 7. Is sufficient time scheduled for board meetings? 8. Do board meetings focus primarily on strategic issues? 9. Has the board explicitly agreed on annual goals and a measureable work

plan? 10. Did the board meet its Board Annual Work Plan goals? If not, why not? 11. Has the board invested time in its development? If yes, how many hours? 12. Is inadequate performance of any directors being addressed? 13. Have there been any breaches of the Code of Conduct by directors? How have they been dealt with? 14. Are all directors encouraged to participate in meetings? 15. Do all directors support board decisions outside the board meeting? 16. Are directors aware of each other’s knowledge

and expertise relevant to the organisation? 17. Do directors challenge each other’s fundamental assumptions during board discussions? 18. Does the board create a “safe environment” for directors to challenge each other’s ideas and to be challenged? 19. Do directors comment candidly on contentious and sensitive issues? 20. Is there sufficient board input into monitoring and evaluation of the chief executive officer? 21. Does the board effectively inquire into major performance deficiencies? 22. What does the board need to

improve on? 23. What qualities and competencies are needed by future board members? What is the board doing to ensure they are obtained? 24. Does the board get sufficient information prior to doing the chief executive officer evaluation? 25. How do you rate the overall effectiveness of the board? Governance audit and board evaluation promote good practice Both the governance audit and the board evaluation raise awareness of what good practices are and what specific areas the board needs to address to meet good standards of practice. Once all the issues in the governance audit have been addressed, you need only repeat it every two years to ensure that your organisation’s policies and procedures continue to reflect the corporate governance principles. The board evaluation should be conducted

annually. Board evaluation items should be amended to reflect current issues (ie areas that need improvement) and areas where the board performs well can be removed from the list but kept for future reference. It is best to remind the board that evaluations can be uncomfortable at times but that the lasting and often significant benefits far outweigh the time and effort required. Director evaluation Board evaluation is not the same as director evaluation. Board evaluation examines the performance of the whole team of directors working together and their collective outputs. Individual director evaluations assess each director’s contribution to the board. Board evaluations are usually developmental in approach. That is, their purpose is to improve the development of the board’s processes and thus its outputs. Individual director evaluations more often assess the director’s performance. If a director’s performance is found to be too inadequate, he or she may be asked to resign. The governance audit may be conducted at any time without notice as it evaluates the entity’s governance structure, not the board or directors’ performance. Board evaluations and director evaluations should only be carried out after the board and directors have been informed of the criteria they are expected to demonstrate and have been given adequate time and feedback to achieve that performance. Board and director evaluation criteria should be set a year prior to any evaluation. As with employee performance measures, generic job evaluations are unacceptable and the criteria and measures specific to a director should be pre-agreed before the performance period starts.

Chapter 16: STAKEHOLDER MANAGEMENT Editorial information

Anna Kominik

¶1601 Introduction In today’s 24/7, always-online communications landscape, the need to engage and manage stakeholders is even more important than ever. The media is everywhere, trust is hard-earned and a company’s reputation is in the hands of its stakeholders. What does this mean for business? Stakeholder engagement and management is no longer optional for businesses who wish to stay in business. Doing it well leads to bottom-line benefits, such as higher quality decision-making, increased efficiency, more effective delivery and reputation management. The World Economic Forum’s Global Competitiveness Report shows that, on average, more than 25 percent of a company’s market value is directly attributable to its reputation.1 Successive studies in the annual Fortune 500 “Most Admired Companies” have also shown that the most “admired” companies have much higher price: earnings ratios (about 12 percent higher) than do the less “admired” companies, a US$5 billion increase in market capitalisation for the

typical Fortune 500 company.2 There is no “one size fits all” model for stakeholder engagement. The stakeholder engagement process described in this chapter should be tailored to the particular needs of the project, stakeholders and the situation. Ensuring appropriate engagement requires good judgment. Asking the “what”, “who” and “how” questions are essential in determining the most appropriate ways to engage stakeholders. Poorly thought through engagement practices can create mistrust, waste stakeholders’ time and lead to “engagement fatigue” — a reluctance to participate in or engage with an organisation in the future. Footnotes 1

World Economic Forum Global Competitiveness Report 2012–2013.

2

RJ Burke, G Martin, CL Cooper Corporate Reputation: Managing Opportunities and Threats (Gower Publishing, 2011) at ch 1.

¶1602 Defining a stakeholder? A stakeholder is anyone — a person, group or organisation — with something to gain or lose from the actions of your organisation. Stakeholders can affect or be affected by the organisation’s actions, objectives and policies. They may have a direct or indirect interest in the business, and may be in contact with the business on a daily basis, or just occasionally. Stakeholders will have different interests in different cycles of business. For example, some stakeholders will not be as relevant to

an organisation in a business-as-usual state, but could have the motivation and power to advance or harm the prospects of a future undertaking, or during a time of crisis. The dynamic between stakeholders and shareholders also needs to be managed well. The aims and objectives of the stakeholders can come into conflict with those of shareholders, where shareholders become focused on short-term profits, while stakeholders’ objectives focus on longer-term actions (environment, social responsibility etc). In this case, companies have to balance short-term gain against longer-term sustainability. For example, the risk of losing their ability to generate future profits (eg the workers may go on strike, customers refuse to buy the company’s products or reputation is damaged, which impacts on its ability to trade or raise capital). For most organisations, a typical stakeholder list is likely to cover most if not all of the following groups:

Figure 16.1: Typical stakeholders and their interests Stakeholder Group

Interests

Shareholders

They will be interested in their dividends and capital growth of their shares.

Customers

Quality and safe products and/or services, continuity of supply, ethical behaviour

Management and Employees

Remuneration, job security, honest, timely and reliable communication, positive company culture, values and behaviours. They may also be shareholders.

Trade Unions

Preservation of members’ employment conditions (eg remuneration, quality, job security)

Funders

Credit worthiness, financial

performance, timely, honest and transparent reporting on financial matters Community/Public

Creation of jobs, contributions to the community, environmental protection, honest, timely and transparent communication

Pressure Groups

Interested in whether the business is acting appropriately towards their area of interest.

Iwi

Environmental performance, resource protection and stewardship, creation of jobs for whānau, community involvement

Suppliers

Equitable business opportunities, timely payment

Statutory bodies — Government and regulators

Collection of taxes (eg income tax, goods and services tax), employment figures, legislative compliance, honest, transparent reporting

Action: Stakeholder in business-as-usual vs crisis It is important to understand that a stakeholder list is likely to be different for business-as-usual state versus a time of crisis or when advancing a new initiative. Understanding how stakeholders change depending on the issue: • Do a five-minute brainstorm of the stakeholders associated with your organisation in a business-as-usual state. What are their motivations? • Now do a brainstorm of the stakeholders associated with your

organisation in a time of crisis. Are their stakeholders on the list that were not there before, under the business-as-usual scenario?

¶1603 Building a stakeholder management strategy Stakeholder engagement and management starts with building a base of knowledge about who you are engaging with and why you are engaging them. When planning a new activity or managing a difficult project, it is useful to map out those individuals or groups with anything to gain or lose from it. In general, going through a stakeholder management process also helps an organisation take a more informed view of the possible outcomes of a proposed course of action. Stakeholder management can be undertaken in a four-step process: Key component

Action

Step 1: Who to engage

•

Creating a list of relevant stakeholders

Step 2: Priorities and purpose

•

Mapping each stakeholder on to the quadrants of a stakeholder analysis tool to determine the suitable level of engagement

•

Identify why engagement is important

•

Identify what outcomes you want to achieve by undertaking stakeholder engagement

•

Choose a suitable method of

Step 3: How to engage

engagement

Step 4: Measure and monitor

•

Plan engagement — timing, resourcing, responsibilities

•

Determine the key messages to communicate

•

Develop performance measures to assess each stage of the engagement process

•

Actively monitor and report on the outcomes of engagement

Step 1: Who to engage The first step of effective stakeholder engagement is to understand the organisation’s stakeholders — who they are, what they care about, and how they relate to the initiative or issue. There is no magic list of stakeholders and you should not agonise over whether your stakeholder list is “right”’. By working through the mapping process, you will create a robust, relevant, prioritised stakeholder list — which will change over time.

Action: Brainstorm a list of stakeholders without screening, including everyone who has an interest in your objectives today and who may have one tomorrow. Here are some things to consider in your brainstorm: • Think about past and ongoing engagement: Look at your organisation’s existing engagement activities. What are the objectives of these activities? What stakeholders communicate regularly with your company? What groups do they cover well? Where can you reach beyond this existing comfort zone to engage with lesser-known stakeholders?

• Be forward thinking: Consider potential stakeholders from new markets, new technologies, new customers, and new potential regulation. Depending on your objectives, the relevant stakeholders you need to engage with may not play the usual sustainability roles, but may instead serve other functions relevant to your business. • Be diverse: Make sure to include a rich diversity of stakeholder expertise, geography, and tactics from across the spectrum. This is an opportunity to reach out and mix the old with the new, including individuals from each of the following stakeholder categories: influencers, collaborators, advocators, and implementation partners. • Be social: Social media provides an unparalleled opportunity to identify and reach lesser-known stakeholder groups. Review blogs, forums, networking, reviews, and news sites to discover stakeholders relevant to your business and to learn about their interest in your activities. • Be aware: People have a tendency to focus on formal authorities in the mapping process, but the loudest voices or heaviest campaigners are not necessarily your key stakeholders. Step back and add silent members to your list because they may have a hidden wealth of expertise.

The second part of the mapping process is to “group” stakeholders. Using the table in Figure 16.2, identify organisations and, where possible, individuals in the following categories: 1. Internal stakeholders, such as employees, potential employees, unions 2. Connected Stakeholders, such as suppliers, direct customers, indirect customers, analysts, regulators and funders and local

community (eg around a facility), regulators, policy makers and decision makers 3. External Stakeholders, industry, Central and Local Government officials and elected officials, competitors, industry associations, industry opinion leaders, media and wider public/community. Figure 16.2: Categories of Stakeholders

Step 2: Priorities and Purpose Once you have grouped the list of stakeholders, it is useful to better understand their relevance and to prioritise them based on their relative usefulness for this engagement. The following table will support you to map where individual stakeholders will be on the “interest’ scale. Are they actively involved? Are they highly influential or less so?

Figure 16.3: Stakeholder Impact Matrix

The level of interest on the horizontal axis in Figure 16.3 measures the degree of interest or concern the stakeholder has about the organisation and its activities. Impact, on the vertical axis, measures the influence (or power) the stakeholder has over the organisation and to what degree the stakeholder can help achieve, or obstruct, the organisation’s activities or plans. For example: • Stakeholders with high impact and a high degree of interest need to be managed closely, with regular consultation on important issues. If they are critical, it is unlikely that these stakeholders will ever become champions, so the best option is to neutralise any actions they might take that could potentially harm or derail the initiative or inflame the issue. • Stakeholders with high interest but low impact need to be kept informed on issues. As supporters of the organisation, they may form the basis of an interest group or become goodwill

ambassadors. • Stakeholders with high impact but low interest should be communicated with through information and consultation on areas of interest. Communication with stakeholders in this category should also aim to increase their interest in the organisation. Analysing Stakeholders — Engaging and managing stakeholders Positioning stakeholders according to the level of interest, the impact or the advantage they provide is also an important consideration in the analysis phase, as this will help to determine the most appropriate management strategy. Use the following table to create and populate a chart with short descriptions of stakeholders and their contribution. Assign values (low, medium or high to these stakeholders). This will help you decide which stakeholders to engage with and when.

Figure 16.4: Analysing stakeholders Stakeholder Group

Contribution Influence (Goals, motivations and interests)

Internal Stakeholder/Connected Stakeholder/External Stakeholder

Does the High/medium/low High/medium/low stakeholder have information, counsel or expertise on the issue that could be useful?

eg

The successful

High

Interest

High

delivery of the project on budget and on time Internal Stakeholder

Senior Management Step 3: How to Engage? Good stakeholder engagement is built on relationships of trust and respect — both of which take time and effort to develop and sustain. Stakeholders may not agree with what you are doing but, with good stakeholder management, they may respect the way you behave. To be successful, stakeholder engagement (communication, meeting, informing) needs to be focused (short-term and long-term goals), consistent and ongoing. It is not a process that is “dusted off” periodically in order to tick a box. It must become part of the organisation’s operating philosophy and culture for an organisation that is focused on results and open to learning from its stakeholders. It is not practical, and usually not necessary, to engage with all stakeholder groups with the same level of intensity all the time. Being strategic and clear about who is being engaged with and why, will make sure stakeholder engagement is effective in terms of money, time and result. There are some basic principles for best practice stakeholder management that support great engagement:

Figure 16.5: Basic principles for best practice stakeholder management Best practice

What it looks like

Get in early

Do not wait until a crisis or a deadline is looming to engage. Early engagement provides a valuable opportunity to influence public perception and set a positive tone with stakeholders. While taking a proactive approach early can feel counterintuitive, it will pay dividends: You may feel it is still early days and you do not have all the answers yet or are worried about raising expectations. The reality, most likely, is that people’s expectations are already raised in some form or other, and that speculation about the project and the company is beginning to circulate. You can be clear upfront that there are still uncertainties and unknowns. Use early interactions with stakeholders as a predictor of potential issues and risks and to help generate ideas and alternative solutions on early design questions/issues.

Be consistent, honest and transparent

Good stakeholder engagement means being more transparent and accountable as a means of promoting understanding about the organisation and gaining stakeholders’ trust. Perception matters. If organisations are viewed as closed or secretive, stakeholder trust can be affected. It is important to be honest and “tell it like it is” even if the news is not likely to be received well. Companies that own up to their mistakes are respected and trusted more than those that remain silent or add a “positive spin” to issues. Consistently follow through on commitments to

stakeholders. Provide meaningful and accessible information

Information provided to stakeholders should be consistent, timely, meaningful and easily accessible. Lack of information can lead to the spread of misinformation, damaging an organisation’s reputation and undermining efforts to engage in an informed dialogue with stakeholders. Meaningful information answers frequently asked questions fully and frankly.

Allocate responsibilities

It is normal for stakeholders to engage with a number of people in an organisation. It is essential that these diverse engagement activities are co-ordinated. Allocate responsibility for individual stakeholders or stakeholder groups to an individual within the organisation. Make the effort to personalise relationships through informal and social interactions. Support employees’ efforts to build links to local communities. A current and regularly updated stakeholder database is a useful management tool. Include the various stakeholder groups, their areas of interest, engagement dates, issues raised, commitments made by the organisation, complaints received, actions taken and communications.

Do not be afraid of criticism — treat it as an opportunity to

Take criticism and grievances seriously and deal with them in a reliable and timely manner. Document this information.

learn Factor stakeholder interests into business plans

Consider stakeholder interests and integrate their feedback and legitimate expectations into business plans where possible.

Invest the appropriate level of resource

Invest in the talent required to lead stakeholder management, including hiring, training and developing capability.

Communicate the stakeholder management strategy internally

If stakeholder management is to be truly integrated into day-to-day organisational activities, the concept needs to be “owned” by all staff. Clarifying the link between stakeholder management and its impact on the organisation’s sustainability raises awareness that stakeholder relations is a company-wide responsibility. All staff need to understand the importance of serving as company “ambassadors” to cultivate and maintain good working relationships with external stakeholders. The Action Plan

Having completed the exercises above, you will have most of the information you need to plan how to engage with your stakeholders. The best action plan will be tailored to all three categories of stakeholder — internal, connected and external. This approach makes sure the actions and messages are tailored for the appropriate audience. Using the table below, work through the planning exercise using the steps below: 1. Plan your approach to stakeholder management The amount of time you should allocate to managing stakeholders

depends on the size and difficulty of your projects and goals, the time you have available for communication, and the amount of help you need to achieve the results you want. Think through the help you need, the amount of time that will be taken to manage this and the time you will need for communication. Help with the project could include sponsorship of the project, advice and expert input, reviews of material to increase quality, etc. 2. Think through what you want from each stakeholder Next, work through your list of stakeholders thinking through the levels of support you want from them and the roles you would like them to play (if any). Think through the actions you would like them to perform. Write this information down in the “Desired Support”, “Desired Project Role”, and “Actions Desired” columns. 3. Identify the messages you need to convey Next, identify the messages that you need to convey to your stakeholders to persuade them to support you and engage with your projects or goals. Typical messages will show the benefits to the person or organisation of what you are doing, and will focus on key performance drivers like increasing profitability or delivering real improvements. 4. Identify actions and communication Work out what you need to do to manage the support of these stakeholders. What resources do you have available and how can you realistically manage the communication to and the input from your stakeholders. Focusing on the high-power/high-interest stakeholders first and the low-interest/low-power stakeholders last, devise a practical plan that communicates with people as effectively as possible and that communicates the right amount of information in a way that neither under nor over-communicates. As a rule, it is recommended that you communicate with your

high-impact stakeholders face-to-face in their own environment (or a neutral, social environment). Organisations that choose a venue where stakeholders feel comfortable tend to have a more effective engagement process because: • the engagement process is transparent • the choice of venue sends the message that the organisation values the stakeholder’s input, and • stakeholders are more likely to feel ownership of the engagement process.

Figure 16.6 Sample Stakeholder Management Plan Stakeholder/Stakeholder Name of Desired Group individual/organisation Action

Method of Engagement

Internal Stakeholder/Connected Stakeholder/External Stakeholder

eg One-onone meetings Workshops Email Social media Media

Name

Champion Does not criticise Supports with information

Step 4: Measure and Monitor The quality of relationships can change over time and the frequency or intensity of engagement may vary at different times. It is useful to regularly monitor key stakeholders’ level of satisfaction with the organisation and the engagement process in particular. Seek feedback and ensure that the information and insights gained are translated into appropriate action. Principles of best practice in relation to monitoring and reporting on

the effectiveness of stakeholder engagement are outlined below: Measure stakeholder satisfaction Periodically conduct stakeholder satisfaction surveys using the same questions over time. (Employee engagement surveys are common in large organisations to measure the satisfaction of this key stakeholder group.) By identifying and gauging changes in satisfaction levels and their underlying causes, the survey information enables the company to make adjustments to the process of managing stakeholder expectations. Use independent administration of the survey process to add independence and credibility to the process. Consider setting up a stakeholder forum. This provides an opportunity to speak directly with a core group of stakeholders. Encourage feedback An organisation should be open to feedback from stakeholders and should seize any learning opportunities that may arise. It is important to periodically check how well an organisation is communicating with its various stakeholder groups. For example, the annual report sent to shareholders may be the only opportunity a company takes to communicate with its shareholders. One way of monitoring the effectiveness of this communication is to send a questionnaire to shareholders requesting feedback about the annual report. Alternatively, an organisation may consider entering the annual report into business reporting awards to gauge how well the organisation is communicating with its shareholders. Manage risk Stakeholder engagement and management can be complex and present varying levels of risk. The more effectively these risks are managed, the more successful and effective the stakeholder

engagement process will be. Some risks that are common to stakeholder engagement processes and to watch out for are: • stakeholders having a different understanding of the engagement objectives and different expectations about the outcomes of the engagement process • stakeholders having insufficient time to contribute fully or raise concerns, for example, due to a short timeline. Risks can be managed by developing scenario-based strategies or contingency plans.

¶1604 Stakeholder engagement and corporate social responsibility As business affects everyone’s lives, the number of stakeholders seeking business responsibility is very large. This means having a social licence to operate is an important part of success, and is a significant factor in stakeholder management. Some would argue that companies already contribute fundamentally to society through service delivery, wealth creation and the provision of jobs. Under this argument, companies are, therefore, by definition, already socially responsible, and for this reason there is no need to undertake additional community engagement or initiatives. While strictly true, this argument ignores the value of further shared value that can be created with communities. It also ignores the enormous power that has accrued to consumers and pressure groups over recent decades. Globalisation and the online world has created a new era of consumer power and advocacy. This environment is characterised by unprecedented influence over whether a company succeeds or fails. Given global concern about the environment and high profile instances of business fraud and excess, consumer calls for more

responsible business behaviour resonate widely. Even though the vast majority of businesses operate to high ethical and environmental standards, this may not be enough in a competitive environment where consumers demand action in additional areas. How community engagement and CSR programmes are changing Community engagement and CSR are often viewed simply as a compliance issue — something that companies “add on” to their core business to help them manage risk with customers, communities and regulators. At its barest form, engaging with community and having a formal programme of CSR is a form of self-regulation, where a company voluntarily complies with certain norms or standards around issues such as the environment, human rights, industrial relations, corruption and other issues of importance to the wider community. CSR is increasingly recognised as a growing area of strategic value creation for companies. Nearly all listed companies report having a CSR program. The committed core of these companies is spending in the region of US$50 million a year on CSR. However, the traditional standard corporate practice is to invest and develop CSR and sustainability programs with minimal engagement from those they materially affect — customers, suppliers, employees, local communities, investors and others — also known as their stakeholders. There is in many instances an unspoken “social licence to operate” that good community engagement and corporate social responsibility programmes support, and without which a company may find itself facing difficult competitive threats.

Some of the benefits of community engagement and CSR are: • As well as delivering benefit to communities, good community engagement helps boost consumer trust.

• In a closely watched regulatory environment, CSR and community support can also stave off heavy regulation, potentially allowing companies and sectors to claim the right to light-handed regulation or self-regulation.

The core of this social licence is to see community engagement as more than a set of discreet actions, such as cutting water or energy use, reducing carbon emissions, or supporting community events, to an ongoing engagement with community and stakeholders in a way that is sustainable and authentic. The common denominator in any form of social responsibility is that the company and stakeholders get shared value from the interaction and engagement. Undertaking stakeholder engagement and management is a key tool in engaging with the right people at the right time and revealing opportunities and threats not otherwise apparent.

Chapter 17: CHARITIES AND OTHER NOT-FOR-PROFIT ORGANISATIONS Editorial information Sue Barker

¶1701 Introduction It has been said that the success of any organisation, including charities and other not-for-profit organisations (NFPs), is dependent on strong governance. Effective leadership and governance are essential prerequisites for success. In the words of Peter Drucker: Only three things happen naturally in organizations: friction, confusion and underperformance. Everything else requires leadership. Difficult questions frequently arise around governance and administration and the resolution of disputes. The consequences of poor governance can be serious, as office holders may be held liable for the consequences. The principles of corporate governance, and the distinctions drawn between governance and management, apply as much to NFPs as they do in the corporate and business world. Governance in an NFP context may even be more complex, because NFPs have wider objectives than simply maximising shareholder value, wider stakeholders than owners, and they rely heavily on volunteers for governance capacity. This chapter discusses governance in a not-for-profit context. It

examines, where practical, the Exposure Draft: Incorporated Societies Bill (the Exposure Draft), which was released by the Ministry of Business, Innovation and Employment (MBIE) on 10 November 2015 (see Incorporated Societies Bill — Exposure Draft, which has been reproduced in the CD). Although the Exposure Draft will formally apply to incorporated societies only, it proposes a legislative framework that is intended to promote “high quality governance”, and that is likely to become “best practice”. The Exposure Draft, therefore, provides a useful framework for governance in a not-for-profit context generally. The Exposure Draft is subject to change as it works through a consultation process, and then a Parliamentary process, following expected introduction of a new Incorporated Societies Bill in 2017. All references to clauses in this chapter are from the Exposure Draft, unless stated otherwise, and refer to what is proposed to be codified in the Exposure Draft.

¶1702 Challenges Community organisations play a very important role in New Zealand society. They have a direct impact on New Zealand’s social and economic development through the provision of important services, and the development of strong communities. However, NFPs in New Zealand are currently experiencing a period of significant change. For example:

(i) In 2013, the Government enacted financial reporting reform that represents the most significant change in the financial reporting requirements imposed on charities in New Zealand’s history. From 1 April 2015, all of New Zealand’s approximately 27,000 registered charities must prepare financial statements that comply with financial reporting standards issued by the External Reporting Board (XRB) (see www.xrb.govt.nz/Site/Accounting_Standards/Current_Standards/Standards_f For_Profit_PBEs/Stds_for_Not-For-Profit_T1-4.aspx). These financial statements must be filed annually with the charities regulator (previously the Charities Commission, and now the Department of Internal Affairs — Charities Services Ngā Rātonga

Kaupapa Atawhai and the Charities Registration Board). The financial statements will, therefore, be publicly available on the charities register (unless the charities regulator has approved a restriction on public access in the public interest, which is rarely given). Included among the requirements is the preparation of a “service performance report”, which requires the articulation of non-financial information such as why a charity exists and what it is trying to achieve (see Public Benefit Entity Simple Format Reporting — Accrual (Not-For-Profit)). Under the Exposure Draft, incorporated societies that are not registered charities would be similarly required to file financial statements prepared in accordance with XRB standards. The requirements can also be expected to become “best practice” for the not-for-profit sector generally. (ii) The new Health and Safety at Work Act 2015 applies from 1 April 2016 and represents a major change to New Zealand’s health and safety system. Any charity or NFP that employs at least one paid worker will be a “person carrying out a business or undertaking” (PCBU) and subject to the requirements of the Act, even if the charity or NFP is run by an unincorporated group of volunteers (see chapter ¶5). (iii) As discussed above, the Government released an Exposure Draft of an Incorporated Societies Bill, which proposes to repeal and replace the current Incorporated Societies Act 1908. All incorporated societies will need to review their rules (which are proposed to be formally referred to as “constitutions”), to check that they cover all the subject matter required, and that each rule complies with any new statutory requirements.

(iv) The Law Commission has recommended that a new Trusts Act be introduced to replace the outdated Trustee Act 1956. The August 2013 report Review of the Law of Trusts: A Trusts Act for New Zealand (see http://www.lawcom.govt.nz/sites/default/files/projectAvailableFormats/NZLC% recommended, that the new Act summarise and restate the duties

of trustees, and that certain duties be implied into every trust, including charitable trusts. (v) Many organisations established under Te Ture Whenua Māori Act 1993 (TTMA) are registered as charities under the Charities Act 2005. In May 2015, the Government released an exposure draft Te Ture Whenua Māori Bill, which proposes to repeal and replace TTMA. A key issue in the context of the reforms is to help Māori landowners facilitate decisions on the governance or utilisation of their land. (vi) It does not appear to be widely appreciated that the Charities Act 2005 is part of New Zealand’s response to the global moneylaundering and terrorist financing threat. Charities and other NFPs that carry out any of a wide range of financial activities, such as investing, administering or managing funds or money on behalf of other persons, are required to comply with the requirements of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the AML/CFT Act), unless they have a Ministerial exemption . NFPs that handle money are likely to be “reporting entities”, with obligations under s 6 of the AML/CFT Act. There are also many other challenges facing charities and other NFPs at the current time. For example: (i) There are significant pressures on funding, with increasing costs, and increasing demand for services, but diminishing revenue streams. Dependency on government funding is a key issue, with some describing the current Government contracting environment as undervaluing, undermining and underfunding important social services. Examples of difficulties include the prevalence of shortterm Government contracts, which make it difficult for an organisation to plan. An organisation may also be expected to do more work than is specified (and, therefore, funded) in the contract, and there is an ever-present threat that a contract may not be renewed, potentially forcing closure of the organisation.

Example Relationships Aotearoa, once New Zealand’s largest provider of professional counselling and relationship education services, closed its doors in June 2015 after over 60 years’ operation, citing “unrealistic” and “underfunded” government contracts. Refer to Relationships Aotearoa — our story, 19 May 2015 (http://www.scoop.co.nz/stories/PO1505/S00207/relationshipsaotearoa-our-story.htm) for more.

(ii) Regulatory issues are causing difficulty in a number of respects. For example, the charities regulator has controversially taken a very narrow approach to the definition of charitable purpose, which has seen many “good” charities fail to gain or maintain registered charitable status — see the discussion in S Barker Deregistered charities, New Zealand Law Journal, April 2014 at 87. Advocacy is a particular area of difficulty and, even following the Supreme Court decision in Re Greenpeace of New Zealand Inc [2015] 1 NZLR 169, many charities fear speaking out in furtherance of their charitable purposes for fear of losing their registered charitable status. The resulting “democratic deficit” is of considerable concern.1 Sport is another area of difficulty, with many high-profile charities deregistered, despite many years as fully compliant charities, as a result of changes in jurisprudential interpretation (eg Swimming New Zealand Incorporated, Deregistration Decision No D2014-3, 30 September 2014; and New Zealand Rowing Association Incorporated, Deregistration Decision No D2015-3, 11 September 2015). The problem is exacerbated by new tax rules, which require deregistered charities to divest themselves of all their assets within 12 months of deregistration or pay tax on the balance (Income Tax Act 2007, s HR 12). Deregistered charities may also face automatic loss of donee status.2 Deregistration as a charity can force an organisation to close.

(iii) The charities regulator also appears to be adopting a “hands-on” approach to issues of governance by registered charities. For example, the charities regulator appears to be taking a very strict approach to issues such as conflict of interest, setting a very high bar that many charities in a small country like New Zealand may be simply unable to meet.3 This approach may become extrapolated by funders and other stakeholders into de facto “best practice” for the NFP sector. (iv) One of the key challenges facing the NFP sector in New Zealand is being able to attract people into volunteering their time to run, or be involved in, NFPs. This problem is being exacerbated by developments in technology, causing people to perhaps eschew annual general meetings, for example, for the immediacy of social media. Online meeting attendance and voting is increasing for organisations who want to retain their democratic structure and increase member participation. All of this reinforces the need for strong governance in an NFP context, as well as the need to find, develop and nurture outstanding leaders. Footnotes 1

By contrast, Australia, for example, has enacted legislation to clarify specifically that charities may have “political purposes” (paragraph (1)(l) of the definition of “charitable purpose” in s 12 of the Charities Act 2013 (Cth)). Canada also proposes reforms to: “Allow charities to do their work on behalf of Canadians free from political harassment … with an understanding that charities make an important contribution to public debate and public policy” (see http://pm.gc.ca/eng/minister-rnational-revenue-mandateletter, last accessed 14 January 2016).

2

Donee status is a key tax privilege. Donors who make donations to a “donee organisation”, as defined in s LD 3(2)

of the Income Tax Act 2007, may be eligible for tax credits or deductions for their donations. There is no requirement for a donee organisation to be registered as a charity, and under s LD 3(2)(a), donee organisations may have purposes that are wider than charitable. However, Inland Revenue has a current practice of removing donee status from deregistered charities, which seems likely to remain unless and until it is successfully challenged. 3

See, for example, the sample conflict of interest clause at: https://charities.govt.nz/im-a-registered-charity/officerinformation/officer-kit/conflict-of-interest/, which requires that a conflicted officer not participate in decision-making and not be counted for the purposes of a quorum. The approach proposed in cls 56 to 65 of the Exposure Draft does not include these requirements.

¶1703 Types of not-for-profit entity When considering establishing a charity or other NFP, the range of available structures is the same as for any other legal person in New Zealand. There is no legal entity in New Zealand specifically designed for charities: charities must “make do” with legal structures fashioned largely for other purposes, such as for family property holding (trusts) or commercial endeavour (companies). With the exception of limited partnerships, which are discussed briefly below, the types of available NFP structures broadly fall into three broad categories: (i) Societies (ii) Trusts, and (iii) Companies.

The characteristics of the most common NFP organisations are outlined in Figure 17.1 below.

Figure 17.1 Characteristics of most common NFP organisations Type of organisation

Society

Charitable society

Charitable trust

Charitable company

Formed or evidenced by (what is generically known as) a “constitution

Constitution (sometimes referred to by other names such as rules or regulations)

Constitution (sometimes referred to by other names such as rules or regulations)

Trust deed, declaration of trust, or will or codicil

Constitution

Incorporation

May be unincorporated, or incorporated under the Incorporated Societies Act

May be unincorporated, or incorporated under the Incorporated Societies Act

May be unincorporated, or incorporated under the Charitable Trusts Act 1957

Must be incorporated under the Companies Act 1993

Trustees

Shareholder

(Note that the Exposure Draft proposes to remove the ability to incorporate a charitable society under the Charitable Trusts Act 1957) Ultimate control

Members of society

Members of society

(members or nominal owners) Minimum number of members

Currently 15, but proposed to be reduced to 10 (cls 8(1), 66). A corporate member counts as 3.

Currently 15, One trustee but proposed to be reduced to 10. A corporate member counts as 3

One shareholder

Members Yes, through enjoy benefits the society’s activities, but must exclude personal financial benefits

Society exists None — for for charitable charitable purposes only purposes only (however, incidental private benefits are not inconsistent with charitable purposes — see case study below).

None — for charitable purposes only

Potential for registration with the charities regulator

If the society exists for charitable purposes only, but:

If the trust exists for charitable purposes only, but:

If the company exists for charitable purposes only, but:

• a noncharitable purpose is not inconsistent with charitable status if it is

• a noncharitable purpose is not inconsistent with charitable status if it is

• a noncharitable purpose is not inconsistent with

Not unless the society qualifies to be a charitable society

“ancillary” (Charities Act 2005, s 5(3) and (4)), and

“ancillary”, and

charitable status if it is “ancillary”, and

• incidental • incidental private benefits private are not benefits are not • incidental inconsistent private benefits with charitable are not status. inconsistent with charitable status.

inconsistent with charitable status.

Committee (often referred to as the executive, the council, the board etc)

Board of directors

Governance vested in

Committee (often referred to as the executive, the council, the board etc) (cl 37)

Term of office of those in governance

Established in Established in Established in the constitution the constitution the trust deed, (cl 24(1)(g)(iii)) declaration of trust, or will or codicil

Most common method of appointment or removal of those in governance

Election by members, and in exceptional circumstances may be removed by general meeting of

Election by members, and in exceptional circumstances may be removed by general meeting of

Board of trustees

Established in the constitution

Deed of Election by appointment shareholder and retirement; (provision can be made for the election of trustees —

members (cl 24(1)(g))

members

Democratic — ultimately in the hands of members

Democratic — ultimately in the hands of members, but always subject to charitable purposes

Autocratic — solely in the hands of trustees, but always subject to charitable purposes

Democratic — ultimately in the hands of shareholder but always subject to charitable purposes

Accountability • to members of those in of the society in governance general meetings (see cl 71)

• primarily to charitable purposes and intended beneficiaries of charity

• Not to whoever appointed (or elected) them, but to charitable purposes

• Subject to charitable purposes, to shareholder of company

Mode of control of those in governance

• to Registrar of Incorporated Societies in a statutory supervisory role see Pt 4 and cl 109)

• subject to • to • to charitable beneficiaries of beneficiaries purposes, to charity of charity members of the society in general meetings

• to liquidators on winding up

• to Registrar of Incorporated Societies in a statutory supervisory role

• to Registrar of Incorporated Societies in a statutory supervisory role

• to Registra of Companies a statutory supervisory role

• to the High Court on judicial review

• if registered under the Charities Act

• to AttorneyGeneral under s 58 of the

• to Attorney General under s 58 o

(see Pt 4)

2005, to the charities regulator

Charitable Trusts Act 1957

the Charitable Trusts Act 1957

• to AttorneyGeneral under s 58 of the Charitable Trusts Act 1957

• if registered under the Charities Act 2005, to the charities regulator

• if registere under the Charities Ac 2005, to the charities regulator

• to liquidators on winding up

• to liquidators on winding up

• to liquidators o winding up

• to the High • to the High Court on judical Court on review judicial review and under Trustee Act 1956

• to the High Court under the Companies Act

Organisation’s Primarily by activities members’ funded by subscriptions and by charges for services

Primarily by members’ subscriptions and by charges for services

Primarily by donations, by grants obtained, and by charges for services

Primarily through trading activities

Where net assets go on winding up

Cannot go to members, must go to charitable purposes

Cannot go to trustees, must go to charitable purposes

Cannot go t shareholder must go to charitable purposes

Another notfor-profit entity (see cl 24(1)(1) and 24(4) (“notfor-profit entity”))

Example Incidental private benefits Difficult questions may arise as to whether benefits to members are incidental or have become the purpose of the organisation, with many charities failing to gain or maintain registered charitable status for this reason. However, in two recent examples, benefits to individual members did not preclude charitable status: Liberty Trust v Charities Commission (2011) 25 NZTC ¶20-054; [2011] 3 NZLR 68 (HC) concerned a mortgage scheme, based on Biblical financial principles, that was designed to enable New Zealanders to own their own homes “free of the shackles of interest incurring debt” so that they can be “free to fulfil God’s call upon their lives”. The scheme was held to be charitable despite the private benefits to members on the basis that it was a “public example of what is intended to be a Christian approach to money and part of propagating the Christian faith” (at [122]). In Plumbers, Gasfitters and Drainlayers Board v Charities Registration Board (2013) 26 NZTC ¶21-029; [2014] 2 NZLR 489, the Plumbers, Gasfitters and Drainlayers Board was held to be charitable, despite the benefits it provided to the members of the relevant industries, on the basis that its main purpose was to maintain standards for the safety of the public.

There is no perfect legal structure for NFP organisations, but different types of entities have different characteristics, and identification of those characteristics may suggest the more desirable structure. Incorporated societies A “society” (which may otherwise be referred to as an “association” or a “club”) can be thought of as several people who have joined together for a common purpose. In the NFP context, the purpose will be one of mutual interest rather than personal financial benefit. It is not necessary for a society to be incorporated in order to operate, or even to be registered as a charity. However, the risks and uncertainties inherent in unincorporated status are significant. If a society becomes incorporated, a separate legal entity, an “incorporated society”, is created. The central purpose of the Incorporated Societies Act is to enable the creation of a body corporate that is separate from its members, and which can incur

obligations and hold property in its own right. Gaining a separate legal personality is at the heart of why societies incorporate. The benefits of incorporation include: (i) The separate legal entity created by the incorporation process can own assets in its own name. This allows for “perpetual succession”, which means that property and other assets can stay with the incorporated society as individual members and office holders come and go over time without requiring changes of property ownership. (ii) Unlike an unincorporated society, an incorporated society can enter into contracts and incur obligations in its own name. It can also borrow money, give security, sue and be sued, hold licences and consents, and lease and rent property, in its own name. (iii) In the ordinary course of events, an incorporated society is responsible for its own debts and liabilities. Incorporation, therefore, provides a degree of limited liability for members (see cl 69(1)). However, as discussed below, there are exceptions to this where members may be exposed to personal liability. (iv) Incorporation provides a more clearly-defined legal status: the legal character of an incorporated society does not change as members come and go. Incorporation also provides evidence of an organisation’s permanence and the fact that it has at least basic governance structures in place. (v) Incorporation also provides a degree of credibility within the community, which can assist with obtaining funding. Incorporation The Incorporated Societies Act does not currently require societies to have any particular governance structures or arrangements. It does not, for example, require a society to have a committee to run the society’s affairs, nor does it require a society to have any particular officers or office holders.

However, clearly-defined governance structures, clear roles for officers, and processes that support good governance are advantageous to societies. The Exposure Draft is intended to promote high quality governance, for example, by clarifying societies’ basic legal, governance and accountability obligations. As discussed above, the Exposure Draft can be expected to become “best practice” for notfor-profit sector governance. Key features of incorporated societies Contractual relationship Incorporated societies are membership organisations: they are inherently democratic organisations that are ultimately run by their members. A society’s rules (or “constitution” as the rules are proposed to be re-termed) form the basis of membership of the society: all who join a society do so on the basis that they will be bound by the society’s constitution, whatever its rules may be, and whether or not they have read them. Members of an incorporated society are considered to have a contractual relationship with the society. Arguably, members of an incorporated society also have a contractual relationship with each other through the society. However, while it is clear law that a contract exists between an incorporated society and its members, it is not clear whether contract law adequately explains the relationship between a society and its members. The relationship between members of a society is generally exercised “socially” and through democratic processes. Once a prospective member complies with the requirements of a society’s rules, including payment of any membership fee, the prospect becomes a member of a society. On becoming a member, a contract arises between the member and the society, the terms of which are set out in the society’s constitution, with a member, by virtue of their membership, agreeing to be bound by the rules set out in the constitution. Members have a contractual right to have the society’s constitutional rules properly observed. Currently, enforcement of the contract

between a society and its members can be difficult and often requires recourse to the courts, and to principles and concepts not found in society rules or in any statute. However, the Exposure Draft proposes new provisions that are intended to make it easier for members to hold their society to account (cl 3(d)(i) and Pt 4). Applicable legal framework Although incorporated societies are voluntary organisations, the entity and its members have certain obligations imposed upon them by law. In order of precedence, the legal authorities applying to incorporated societies are as follows: (i) Any relevant New Zealand legislation, such as the Incorporated Societies Act 1908 and its proposed successor. While the statutory framework currently provides very little in the way of practical prescription or guidance, the Exposure Draft proposes a significantly more comprehensive and modern framework for the governance and administration of incorporated societies. (ii) Any relevant Court decisions. Currently, much of the law of incorporated societies is not found in statute but in the cases. (iii) The entity’s constitution or rules, which must be registered with the Registrar of Incorporated Societies (“the Registrar”) (and with the charities regulator if the incorporated society is also a registered charity): see Charities Act 2005, ss 17 and 40. (iv) Any bylaws adopted by the entity. Bylaws (which may be referred to by other names, such as “regulations”, “policies” or “guidelines”) are a subsidiary form of rulemaking, commonly used to prescribe matters of operational detail such as financial delegations, codes of conduct of members, and matters relating to day to day operations. While incorporated societies are required to have constitutional rules, it is up to societies themselves to decide whether or not they will have bylaws. Because bylaws are not part of an entity’s constitutional rules, they do not need to be registered and can, therefore, be more readily changed.

(v) Any policies adopted by the entity. Policies have a status below rules and bylaws, and normally relate to procedural matters. Policies are usually made by resolution of a general meeting or of the board. (vi) The well-established customs or tikanga of the society. Clause 25(1)(b) of the Exposure Draft proposes to give express statutory recognition to the ability of societies to articulate their tikanga in their constitutional rules. The expression of tikanga is not limited to Māori organisations: non-Māori societies of course also have their own underlying cultural principles. Societies can express their tikanga or culture in whatever way they wish, but one such method is to include a rule describing the relevant principles and state that the constitution must be interpreted in light of those principles. The proposed statutory recognition of tikanga is intended to encourage the Courts to give greater weight to it when interpreting constitutions. In contrast to companies, incorporated societies must have a constitutional rule setting out their purposes. If those purposes are exclusively charitable, an incorporated society may seek registration as a charitable entity under the Charities Act. Incorporated societies are one of the most common vehicles for carrying out charitable purposes in New Zealand. Approximately one-third of incorporated societies are registered charities. Division of powers Members have the primary responsibility for holding incorporated societies to account and ultimately for determining the fate of the organisation. However, societies differ in the degree to which members are involved in the day to day running of the organisation. Between annual general meetings, a society’s rules generally delegate management of the society to the board (or “committee” as it is proposed to be formally termed). However, the committee of a society is accountable to the membership for its management and administration of the affairs of a society, primarily through general meetings of members. To that end,

members have a fundamental right to be given notice of, attend, and participate in general meetings of the society (unless there is an express constitutional provision suspending membership rights). The ability of members to call a general meeting has been described as a “superior right” and a “safeguard to members” against a committee that is “out of step with the membership”. There is no universal right or wrong way of separating governance and management, and different organisations will organise the division of powers between the committee, and the society acting through general meeting, in different ways. Company law principles relating to the division of powers between a company and its directors and shareholders may be applicable by analogy to incorporated societies, its committee and its members. No ownership interest A key feature of the incorporated societies’ legislation is that members of incorporated societies do not have an ownership interest in a society: incorporated societies “must not operate for the purpose of, or with the effect of, returning all or part of the surplus generated by their operations to their members, in money or in kind, or conferring any kind of ownership in the society’s assets on its members” (cls 3(d)(iii), 24(2) and 68) (http://www.clubsnz.org.nz/news-38/club-news/1113incorporated-societies-act-pecuniary-gain-and-membership.html). The absence of an ownership interest is a key distinction between incorporated societies and companies. The Exposure Draft proposes to make it clear that societies may not distribute profits or financial benefits to their members on winding up (cls 24(1)(m) and 161). The Exposure Draft would instead require surplus assets on winding up to be distributed to a “not-for-profit” entity, proposed to be defined in cl 24(4) to mean: an incorporated society, a registered charitable entity, and/or “a society, institution, association, organisation, or trust, that is not carried on for the private benefit of an individual, and whose funds are applied entirely or mainly for benevolent, philanthropic, cultural, or public purposes in New Zealand”. Voting

As member-driven organisations, incorporated societies operate under a statute designed to protect membership involvement and a degree of democratic decision-making. Despite their inherent democratic nature, however, incorporated societies can give different voting rights to different members. National federations, for example, may choose to give more votes based on factors such as the number of participants in particular areas. Incorporated societies are required to have rules in their constitutions setting the voting procedures for general meetings. National structures Many not-for-profit organisations operate within a national structure, and there are various ways in which this might be achieved: Branches — The Incorporated Societies Amendment Act 1920 currently provides for branch societies, or groups of branch societies, to be incorporated by registered parent societies. The consent of the parent body, and of the majority of members of the branch, is required before the branch can be incorporated. Members of branch societies remain members of the parent society and remain subject to their obligations to the parent society, thus creating a dual membership situation. The Exposure Draft proposes to repeal the Incorporated Societies Amendment Act 1920. Instead, any branch to be incorporated may simply be incorporated as a society in the normal way. Federal structure — An alternative to the branch structure is the federal structure, under which a national or federal body may be formed or constituted by the member societies, in order to create a federal “umbrella”. In this way, the national or federal body is considered to become the “servant” of its constituent societies, in the sense that any society is ultimately accountable to its members. The “bottom-up” nature of a federal structure may assist with alleviating tensions between the exercise of “parental” powers and the wish of branches to exercise autonomous powers that may be present in a branch structure. Ideally, the relationship in a federal structure between members and

the national body will be clearly spelt out in the national body’s rules. Where a federated body is intended to have some powers of action or facilitation, for instance, to assist its member societies, any such power must be expressly conferred, such as by the rules of the national body of which the member societies are members, by the rules of the member societies, or by separate contract. Confederate structure — Alternatively, a confederation of autonomous societies can be formed by contractual agreement, with the confederate entity being incorporated. In contrast to a federal structure, which is membership-based, such a relationship is purely contractual, with the “branches” on an equal footing to the parent. The relationship between the confederate entity and the “branches” needs to be spelt out with some care. A federal or confederate structure requires those involved to focus very clearly on what they want to achieve, how best to achieve it, and how to maintain societal functions under the agreed structure. Essentially, in any national structure, a “parent” society, its “branches”, interest groups and/or members have to decide what they believe is the best societal structure. Obtaining general agreement may not be easy. Private bodies Incorporated societies are essentially private bodies, run by people in their private capacities. A key principle is that incorporated societies should be self-governing and free from inappropriate government interference. The Exposure Draft proposes to give force to this principle, for example, by requiring all incorporated societies to have rules in their constitutions setting out how disputes will be resolved (see discussion below). It is best practice for incorporated societies to include rules to this effect in their constitutions now. Charitable trusts Like incorporated societies, charitable trusts are a common structure for carrying out charitable purposes in New Zealand. Charitable trusts are useful if the initial trustees want to retain control, including through the appointment of further trustees.

If the trustees of a charitable trust are not incorporated, the trustees of a charitable trust will hold the trust funds, and enter into any contracts, in their own name. It is for this reason, and to provide a degree of protection for trustees from personal liability, that the Charitable Trusts Act 1957 provides a mechanism by which the trustees of a charitable trust may incorporate as a board. Incorporating as a charitable trust board under the Charitable Trusts Act creates a body corporate separate from the trustees, which can incur obligations and hold property in its own right. Incorporating as a charitable trust board is an important means by which people can safeguard property to achieve charitable ends, and in many respects act as a separate entity. If the purposes of an incorporated charitable trust board are accepted as charitable by the charities regulator, an incorporated charitable trust board may also seek registration as a charity under the Charities Act 2005. Note that the definition of “charitable purpose” in s 2 of the Charitable Trusts Act 1957 is wider than the definition of “charitable purpose” in s 5 of the Charities Act 2005, including “every purpose that is religious or educational, whether or not it is charitable according to the law of New Zealand”. A key distinction between incorporated charitable trust boards and incorporated societies is that incorporated societies are inherently democratic organisations. By contrast, trusts are neither about membership participation, nor are they about democratic decisionmaking across a membership base. Rather, they are a way of holding and distributing property. Decision-making lies in the hands of the trustees and is inherently autocratic, rather than democratic. In other words, control of the trust funds will be with the trustees, whose obligation is to honour the terms of the trust. There is not necessarily any accountability to a wider membership base: trustees of a charitable trust are not accountable to individuals no matter how committed those individuals may be to the ideals of the trust. Those associated with trusts (as supporters, “friends” or critics) often find this a difficult concept to grasp, but it goes to the legal and constitutional essence of a charitable trust, and is a fundamental

difference from a society with members and an elected committee. Unless registered under the Charities Act 2005, charitable trusts, even if incorporated under the Charitable Trusts Act, are not currently required to file an annual statement of accounts with any regulator. Another option for creating a degree of protection for trustees is for the trustee(s) of the charitable trust to be incorporated in some other way. For example, it is reasonably common for a trustee company or a company incorporated under the Companies Act 1993, to act as trustee of a charitable trust. Charitable companies Although incorporated societies and charitable trusts are the two most common formal structures for New Zealand community groups, many New Zealand charities are structured as companies incorporated under the Companies Act 1993. There is nothing inherent in the limited liability company model that requires companies to be run for profit or to provide a return to their shareholders. Companies can register as charities in New Zealand so long as they have a constitution that contains certain safeguards to ensure charitable funds are only ever applied to charitable purposes. For example, the constitution may require that only charities may be shareholders. Alternatively, if non-charities may be shareholders, the constitution may prohibit any distribution from being made to shareholders. In addition, on winding up, net assets must be distributed to charitable purposes. It follows that charitable companies must have an individual constitution and cannot rely on the default constitution in the Companies Act 1993. Limited partnerships Limited partnerships were introduced into New Zealand by the Limited Partnerships Act 2008, as a flexible and internationally recognised business structure designed to facilitate investment (Limited Partnerships Act 2008, s 3). A limited partnership is a separate legal entity with at least one general partner, often a company, which is responsible for the management of the partnership, and one or more

limited partners. Limited partners, as the name suggests, have limited liability for the entity’s debts provided they do not take part in the entity’s management. Limited partnerships are an increasingly popular choice for Māori joint venture arrangements. Whatever structure is chosen for an NFP, governance will be required.

¶1704 What is governance? There is no universally agreed definition of “governance”; it can be described in many different ways in relation to many different contexts. S Donaldson and S Quinn in Meeting the ACNC governance standards (Australian Charities and Not-for-profits Commission, 12 March 2015) define “governance” as “the practices and procedures that ensure an organisation pursues its objectives effectively and transparently”. Essentially, the role of governance is to transform an organisation’s purpose into tangible outcomes for its communities. Section 10(a) of the Charities Act 2005 lists as a function of the charities regulator the assisting of charities in relation to matters of good governance: The functions of the chief executive are— (a) to educate and assist charities in relation to matters of good governance and management, for example,— (i) by issuing guidelines or recommendations on the best practice to be observed by charities and by persons concerned with the management or administration of charities: (ii) by issuing model rules: (iii) by providing information to charities about their rights, duties, and obligations under this Act and other enactments…. The New Zealand charities regulator — whose website also contains a

link to CommunityNet Aotearoa’s community resource kit (https://www.charities.govt.nz/im-a-registered-charity/running-yourcharity/communitynet-aotearoa/), as well as material on the new financial reporting rules, conflicts of interest, officers, and resolving disputes — contains the following guidance on its website in relation to governance: Clear purpose and direction Effective registered charities are clear about the characteristics and needs of their beneficiaries and their charitable purpose(s) and vision. They use this knowledge to guide decision making and activity. All such information should be included in a charity’s formal document. Strong governance Effective registered charities are run by a clearly identifiable group who make all the significant decisions for the charity. They have the right balance of skills and experience, and understand their own and their charity’s responsibilities and obligations. This group is responsible for ensuring that the charity carries out its work to achieve its charitable purposes. The right people for its activities An effective charity ensures that its people have the right qualities and competence to manage and support the delivery of its services. Sound and prudent An effective charity clearly operates in line with its rules document and can identify the financial and other resources needed to achieve its purpose. It can obtain, control and manage those resources to achieve the best possible value from them. Sport New Zealand in Nine steps to effective governance — Building high performing organisations (Third Edition) (see http://www.sportnz.org.nz/assets/Uploads/attachments/managingsport/strong-organisations/Nine-Steps-to-Effective-GovernanceBuilding-High-Performing-Organisations.pdf), at 46 describes good

governance as being characterised by “the quality of a board’s relationships, the clarity of its communications and the wisdom of its judgements”. Who governs? The governing body Most societies currently have committees that perform management or governance roles, although some smaller societies do not. The governing body of a not-for-profit entity may be known by a range of names such as: (a) board of trustees (b) board of directors (c) executive committee (d) committee (e) executive (f) council, and (g) board of governors. The charities regulator recommends that the governing body (proposed to be known as a “committee”) comprise at least three members The Exposure Draft would require every incorporated society to have a committee of at least three members with responsibility for the affairs of the society (cl 37). Note that cl 43 would also require one of the committee members to be a “contact officer”, whom MBIE registry staff can contact when needed. Once the new legislation comes into force, incorporated societies will be required to have a contact officer at all times, with the name and contact details of the contact officer, and any changes, notified to the Registrar under cl 44. The society’s constitution would also be required to contain rules that set out the composition, roles, and functions of the committee (cl 24(1)(g)).

Some governance issues Policies and procedures As part of its governance role, governing bodies should develop policies and procedures to guide the organisation. These policies and procedures should cover all major aspects of the organisation, including financial. Development of the policies and procedures should be a collaborative process between the chief executive and the governing body. The governing body also has a key role in monitoring the organisation’s policies and ensuring they are communicated, understood and followed. As part of this, the governing body should ensure that policies are reviewed regularly, rather than left to gather dust in a filing cabinet. The composition of the board It is important that governing bodies contain the right mix of skills. This can be difficult to achieve, and a governing body is unlikely to fill every gap in the governance of the organisation. Governing bodies may need to call on specialist skills for a temporary period, for example, by creating a subcommittee and inviting participants with specific skills to join it, or by contracting out such skills. The difference between governance and management In general terms, governance involves making policy decisions, and management involves putting policy decisions into effect, supporting the governance term. However, there is no defining line between governance and management; where the line should be drawn in any particular case often depends on the exercise of judgment. Key in this context is the relationship between the chair of the governing body and the chief executive officer (CEO): it is very important that the CEO, once selected, has a very good working relationship with the governing body, particularly through the chair.

Example Appointing more than one CEO Greenpeace International recently announced the appointment of two coexecutive directors (http://www.greenpeace.org/international/en/news/features/InternationalExecutive-Director): We knew that both of these proven leaders could do the job on their own. But, when we looked at their amazingly complementary skills and experience, the blend of knowledge they would bring, and the challenges we know this job presents to any single individual, we looked back over the literature of coleadership and were compelled by one of its core advantages: resilience. And so, we decided to seize the amazing opportunity of the two of them coleading the organisation. It’s a move consistent with our general shift away from being a highly centralized, hierarchical organisation, to one that is leaderful: one in which everyone is empowered and where responsibilities are shared.

A big commitment A board role should not be undertaken lightly: no one should be in governance simply to “make up the numbers”. Those in governance roles have important duties, for example, to ensure that those who govern and those who manage do their jobs properly. Those in governance roles may potentially be held personally liable for making or supporting erroneous decisions; they have obligations to the organisation and to themselves to articulate any concerns and, where they cannot support a proposal, to vote against it. If the issue is important, they should ask to have their contrary vote recorded in the minutes. Once a decision is made, the members of the governing body are bound by the principle of collective responsibility to either support the decision or, if they cannot do so, to resign. Governance of the NFP requires strict compliance with the provisions of the entity’s constituting document (ie rules, deed or constitution) and potentially heavy responsibilities. Get it wrong and you may find yourself being asked to answer searching questions posed by auditors, government officials, liquidators, lawyers or a court. As a result, getting it wrong (and all you do wrong may be to fail to ask the

right questions or to place mistaken trust in others) can be, at best, personally stressful, and may, at worst, have serious personal financial consequences. Those in governance cannot adopt a policy of “masterly inactivity”. See, generally, Mark von Dadelszen Law of Societies (supra). It is important to understand the obligations of office. Never accept appointment or election as an “ego trip”, as there are serious duties and obligations to be performed. There is potential liability to third parties (including members of the entity itself), to the NFP entity itself, on any liquidation or winding up, and under criminal law. No one size fits all Governance excellence is not easily achieved, and good governance will always be a “work in progress”. Changes in the environment and unexpected challenges will regularly confront a governing body. However, after decades of dormancy, concepts of good practice are developing rapidly.

¶1705 Duties of governance The Charities Act 2005 imposes some duties on officers of registered charities: (i) a duty to notify changes, including if an officer ceases to meet the qualification requirements for being an officer of a charitable entity — s 40 (ii) a duty to file annual returns, accompanied by financial statements that have been prepared in accordance with XRB standards — s 41, and (iii) a duty to assist the charities regulator if it is conducting an inquiry into a charitable entity or other person — s 51. Beyond that, the Charities Act is silent on how to govern a charity. The Incorporated Societies Act 1908 is also silent on the duties and obligations of those who govern or run an incorporated society.

However, case law imposes obligations on officers of incorporated societies that are probably similar to the duties that company directors owe to their companies. The duties owed by those governing charities or other NFPs can be broadly distilled into three broad categories: (i) a duty of loyalty (ii) a duty of obedience, and (iii) a duty of care. We consider each in turn.

¶1706 Duty of loyalty Duty to act in the best interests of the society An officer, when exercising powers or performing duties, must act in good faith and in what the officer believes to be the best interests of the society (cl 48). This duty mirrors s 131 of the Companies Act 1993 (see chapter ¶1). It is very important that officers of all NFPs understand the overriding importance of their duty to act in good faith in the best interests of the entity. The duty of good faith is likely to be considered a fiduciary duty, in a similar manner to the fiduciary duties company directors owe to their companies. A fiduciary is a position that involves an undertaking to act in the interests of another, in circumstances where the other could be harmed if the fiduciary does not act in that person’s best interests. A fiduciary duty is the highest duty known to law. Conflicts of interest The duty of loyalty also encompasses conflicts of interest. According to a New Zealand Law Commission report, A new act for incorporated societies (supra) at 86 conflict of interest occurs: … when a board [member’s] … duty of loyalty to [an] … organisation comes into conflict with a competing financial or

personal interest that he or she (or a relative) may have in a proposed transaction. It is common for conflicts of interest to arise, particularly in the NFP context where a range of interests bring the members together. Rules for dealing with conflicts of interest are considered to be an essential part of any governance regime for bodies corporate. It is, therefore, best practice for the NFP’s constituting document to set out how conflicts of interest, and issues of bias and predetermination, should be dealt with, including whether and if so how, those involved with the organisation may contract with it. Clauses 56 to 65 of the Exposure Draft propose to bring the Incorporated Societies’ legislation into line with the Companies Act by inserting express statutory provisions that set minimum requirements relating to the disclosure of conflicts of interest. These proposals do not require a conflicted officer to recuse themselves entirely: they may participate in discussion and be counted for the purposes of forming a quorum. Note that the new financial reporting standards contain rules requiring disclosure of related party transactions. No unauthorised profits The duty of loyalty also encompasses a duty not to profit from a position of trust: positions of responsibility within NFPs cannot be used for one’s own benefit. In New Zealand Netherlands Society “Oranje” Inc v Kuys and The Windmill Post Ltd [1973] 2 NZLR 163 (PC), the Privy Council agreed that, as a matter of principle, a committee member could not take advantage of business opportunities that arose from his involvement with a society without first disclosing what he was doing (agreeing generally that strict self-dealing duties might apply to dealings with incorporated societies). The making of unauthorised profits by an officer of a registered charity may constitute “serious wrongdoing”, as defined in s 4 of the Charities Act 2005. This may be grounds for deregistration of the entity under ss 32 and 35.

¶1707 Duty of obedience An officer must not act, or agree to the society acting, in a manner that contravenes the legislation or the society’s constitution (see cl 50). This duty mirrors s 134 of the Companies Act 1993. It is implicit in the duty of obedience that an officer must be thoroughly familiar with the express requirements and implications of the entity’s constituting document. It is very important that all involved in the governance of NFPs understand and constantly bear in mind all the details in the constitutions for which they are accountable in order to fulfil this duty. The constitution of an incorporated society defines the purposes of the society and how it is organised and managed. It covers such matters as who can be a member, and, ideally, how decisions are made, how resources are managed, and how disputes are resolved. The constitution helps to ensure that the relationships within the society are successful and that the society can fulfil the purposes for which it is formed. It provides the fundamental structure under which the society will operate, but may also deal with more detailed matters, if the society chooses. Currently, every incorporated society is required to have rules covering at least the minimum matters prescribed in s 6(1) of the Incorporated Societies Act 1908. However, this is only a skeletal framework and, in most cases, societies’ constitutions cover many more matters than those required by statute. Clause 24(1) of the Exposure Draft proposes an expanded list of matters that all modern, well-managed incorporated societies in New Zealand should have, no matter their purpose or their size, covering both basic organisational rules (such as membership, purposes and powers of the society) and basic accountability rules that protect membership involvement and democratic decision-making (such as access by members to society information and internal dispute resolution procedures). Clause 24(1) is proposed to require societies to have rules in their constitutions covering the following matters:

Figure 17.2: Contents of constitution checklist Name of the society Purpose of the society How members join, including a requirement that a person must consent to be a member How members leave Arrangements for keeping the society’s register of members up to date Whether, and if so how, the society will provide access for members to the register of members The composition, roles, and functions of the committee of the society, including: •

the number of members that must or may be on the committee

•

the election or appointment of committee members

•

terms of office of the committee members

•

the functions and powers of the committee

•

grounds for removal from office of committee members

•

how the society will elect or appoint a “contact officer”, whom MBIE staff can contact when needed

How the society will control and manage its finances The control and use of the common seal (if it

has one) Procedures for resolving disputes, including procedures for dealing with complaints and grievances

Arrangements for members’ meetings, including: •

the intervals between general meetings

•

the information that must be presented at general meetings

•

when minutes are required to be kept

•

the manner of calling meetings

•

the time within which, and manner in which, notices of general meetings and notices of motion must be notified

•

the quorum and procedure, including voting procedures, for general meetings; and

How the constitution may be amended; and The nomination of NFPs, or class of NFPs, to which any surplus assets should be distributed on liquidation of the society. Difficulties with many current constitutions Many constitutions maybe or are understood to be poorly written. During its consultation, the Law Commission heard many times of societies with rules that did not serve the purposes of the society well because they were poorly drafted. Often those societies could not afford to buy in expert help at the time of incorporation and did not have access to experts within their membership. When problems arose in later months or years, resolving them became very

frustrating, time-consuming and often expensive. In Appendix A to this chapter, we have endeavoured to update Appendix A of the Law Commission’s Incorporated Societies’ report, for the new requirements set out in the Exposure Draft, as well as the recommended standard provisions that MBIE was set out in Annex A of its Consultation Document. Appendix A may be helpful to incorporated societies as they review their constitutions to transition to, and ensure compliance with, the new Incorporated Societies legislation. For the most part, the recommendations of the Exposure Draft represent best practice, and societies would be well advised to start including them in their constitutions now. Other legislation The duty of obedience, of course, includes compliance with other applicable legislation, such as the new financial reporting requirements (to the extent they apply), new health and safety legislation, and the Anti-Money Laundering and Countering Financing of Terrorism Act 2009.

¶1708 Duty of care An officer of a society, when exercising powers or performing duties as an officer, must exercise the care and diligence that a reasonable person with the same responsibilities would exercise in the same circumstances taking into account, but without limitation (see cl 51): (a) the nature of the society, and (b) the nature of the decision, and (c) the position of the officer and the nature of the responsibility undertaken by him or her. This duty essentially mirrors s 137 of the Companies Act 1993, with one key proposed exception. In s 137, directors have an obligation to exercise the care, diligence, and skill that a reasonable director would exercise in the same

circumstances. Directors are expected to have a reasonable standard of skill when making decisions. The standard is an objective one of a “reasonable director”, although what is required of any reasonable director depends on the actual circumstances. Those running a society are similarly required to meet an objective test of diligence and care. In the context of this duty, there is a slidingscale approach: the standard of care and diligence that would be expected is determined by the surrounding circumstances. An officer would essentially be expected to meet the standard of care that a reasonable person with the same responsibilities within the society would exercise in the circumstances applying at the time. This means that the standard that should be expected from an ordinary volunteer office holder helping out a small social club would be lower than the standard that would be expected from a professional board member, appointed for his or her governance skills, to chair the board of a large complex social service organisation. In each case, the test is whether the person’s actions met the standard that a reasonable person with the same responsibilities within the same society would have exercised in all the circumstances. Whether societies exist to achieve social goals for their members or whether they operate businesses and employ staff are all matters that will be relevant in determining the standard of care and diligence that should reasonably be expected from those running the society. It follows that the applicable standard of care will normally be most affected by the requirements and circumstances of the society or the relevant office, rather than the special attributes and skills of a particular office holder. A lawyer, an accountant or a business person who accepts appointment should not be held to a higher standard than other officers, unless the office they accept necessarily demands particular professional or business skills that are not required of other offices. If, for example, an accountant accepts appointment as financial controller of a large, complex charity, he or she might reasonably expect to be held to a higher standard than if they accepted office as an ordinary committee member of a small local tennis club. However, unlike care and diligence, which are concerned with the

manner in which people go about their roles, skill is a measure of competence. Officers of societies may be chosen for reasons other than their management competence. Many are elected or appointed because they have the confidence and support of the membership based on a broader set of considerations. Many also take on roles because it is their turn, or because no one else is willing or available. In such circumstances, it is reasonable to expect people to be reasonably careful and diligent when undertaking activities for the society, but the Law Commission considered it may not be reasonable to find them wanting because they do not have the necessary competence to undertake the role to a reasonable standard. The Exposure Draft accordingly proposes that an officer of an incorporated society not be similarly required to meet a reasonable standard of skill. Reckless trading or other activities An officer must not agree to the activities of the society being carried on, or cause or allow the activities of the society to be carried on, in a manner likely to cause a substantial risk of serious loss to the society’s creditors (see cl 52). This duty mirrors s 135 of the Companies Act 1993 (except that it refers to the “activities” of the society rather than the “business” of the company). Although incorporated societies, in general, are far less involved in commercial risk-taking activities than companies, the underlying rationale for the duty (that is proposed to be codified) is that anyone charged with acting and making decisions for an incorporated society should be under an obligation not to conduct their society’s business activities (whatever the extent) in a manner that is likely to create a substantial risk of serious loss to the society’s creditors. In other words, those incorporated societies that do engage in business and manage commercial risk are subject to similar duties around reckless trading as companies. At the very least, officers must act with reasonable prudence when incurring liabilities when trading. Duty in relation to obligations An officer must not agree to a society incurring an obligation unless

the officer believes at that time on reasonable grounds that the society will be able to perform the obligation when it is required to do so (see cl 53). This duty mirrors s 136 of the Companies Act 1993. Under s 136, the standard is imposed is one of reasonableness: the director’s belief that the obligation can be fulfilled must be a reasonable one. While the proposed codification of this duty will have little practical effect on small societies, the Law Commission considered it was needed to ensure that those incorporated societies with more significant involvement in business and assets are subject to similar duties to company directors. Duty to exercise powers for a proper purpose An officer must exercise a power for a proper purpose (see cl 49). This duty mirrors s 133 of the Companies Act 1993 (see chapter ¶1). Information and advice When exercising powers or performing duties as an officer, an officer of a society may rely on specified types of information prepared by other persons, in a similar manner to company directors under s 138 of the Companies Act 1993 (with the exclusion of the reference to “financial data”). See cl 54.

¶1709 Duties owed to the society It is important to note that the duties of officers of incorporated societies are owed to the society, and not to members (see cl 55 and [77] of the Consultation document).

¶1710 Who is an officer? It is important to identify who the “officers” of an entity are, particularly in the context of “duties”, as important consequences follow. The term “officer” is defined in s 4(1) of the Charities Act 2005 to mean:

(a) in relation to the trustees of a trust, any of those trustees; and (b) in relation to any other entity,— (i) a member of the board or governing body if the entity has a board or governing entity; and (ii) a person occupying a position in the entity that allows the person to exercise significant influence over the management or administration of the entity (for example, a treasurer or chief executive). In other words, any person who participates in making significant decisions that affect the affairs of a society, or who is able to exercise significant influence over the management or administration of the entity, because of the position they hold or because the officer holders are accustomed to acting in accordance with their wishes or instructions, may be an “officer” of that society (see cl 36).

¶1711 What happens if an officer breaches a duty? If an “officer” as defined breaches a duty, the current position is that a society would probably take internal disciplinary action against the officer. Any serious breach would be grounds for removing the officer from office, and possibly expelling the person from the society. In addition, officers who breach their duties also face the possibility of civil action being brought against them by the society for compensation or restitution for any losses arising from the breach. The Exposure Draft proposes new enforcement provisions designed to give effect to the principles that: (a) societies are organisations with members who have the primary responsibility for holding the society to account, and (b) societies are private bodies that should be self-governing and free from inappropriate government interference. See cl 3(d)(i) and (ii) and Pt 4.

¶1712 Disputes Whether they realise it or not, all societies already have obligations to resolve, or participate in the solution of, disputes or grievances that may arise in their society. Although the Incorporated Societies Act 1908 currently says nothing about disputes, the Courts have regularly held that members of societies can bring matters to Court. Members may seek actions in judicial review,4 or in the law of contract, or under the Declaratory Judgments Act 1908. However, none of these actions are a good fit for disputes arising within societies. Further, having a case go to court, usually the High Court, is expensive in both time and money, and highly likely to be divisive, and potentially destructive, within a society. The process may take years, and may entrench bitterness. It is best practice for societies to include rules for how internal disputes (including complaints) should be processed and dealt with. However, while some societies do provide for this, many do not, and the lack of established procedures (or procedures that fail to meet the basic standards of natural justice) is a common cause of problems in societies. Given the practical inevitability of disputes, the Law Commission recommended that all societies be required to at least have some minimum provisions in place to deal with complaints, disputes, or grievances when they arise, and to do so efficiently and fairly. See cls 24(1)(j), 31 and sch 2 of the Exposure Draft. Such provisions must satisfy existing legal norms for affording disputants natural justice, principally the right for any complainant or alleged “offender” to be fairly heard, and for any decision to be fairly made, without bias or appearance of bias. Having a set of procedures will help to resolve disputes before they escalate. That in turn will reduce the emotional and financial cost of resorting to external resources for resolving disputes. MBIE has proposed a standard set of dispute resolution procedures

that incorporated societies may choose to adopt (see Consultation Document, Standard provision 8 at 33). Under cl 34, a standard provision must be treated as complying with the new Act. The provisions proposed are minimum requirements: so long as they satisfy the minimum requirements, societies will have considerable freedom to develop any procedures that meet their needs. The standard provision has been incorporated into Appendix A, for reference. A society’s constitution may also provide that all or certain kinds of complaints or grievances must or may be submitted to arbitration under the Arbitration Act 1996 (see cl 32). Footnotes 4

Law Commission Incorporated Societies’ Report, at 141: the Courts have found that the decisions of societies may be amenable to judicial review in certain circumstances such as membership decisions, or disciplinary proceedings, or where the decision may have important public consequences or effects.

¶1713 Protecting yourself from liability Those involved in the governance of NFPs must be careful to protect themselves from personal liability. As noted in cl 69(3), members of a society may be personally liable under a contract, or for any tort, or breach of a fiduciary duty, or other actionable wrong committed by the member. Under cl 98, a member who is an “officer” (as widely defined in cl 36) may be personally liable for any loss or damage suffered to a society as a result of a breach of the duties set out in cls 48 to 53. This would include the duty in cl 52, which requires officers not to agree to, cause or allow the activities of the society to be carried on in a manner likely to create a substantial risk of serious loss to the society’s creditors. Clause 106 would

impose personal liability on a member where a financial gain is derived in breach of the principle that societies should not be carried on for the benefit of individual members. Clause 127 would impose personal liability on a person who acts as an officer of a society in contravention of a banning order for debts incurred by the society while the person was so acting. Clauses 77–80 would provide societies with some scope to indemnify members and arrange insurance, to protect them from financial risk, but only in relation to actions carried out in good faith. Members may also be personally liable if they do not make the fact of incorporation clear, or do not make it clear that any liability they incur is for their society. Below are some practical steps that can be taken to protect oneself from liability:

Figure 17.3: Actions to protect oneself from personal liability Always behave honestly and in good faith in the best interests of the society. Make sure the entity is incorporated: incorporation generally provides limited personal liability, provided decision-makers act honestly, prudently, within the parameters of the entity’s constituting document, and not for personal gain. Identify, understand, and follow all legal requirements that may apply to the particular entity (including employment, environmental, local body, licensing, and tax). To protect yourself from potential personal liability for debts or other legal liabilities: •

ensure all communications of the

organisation record the fact that it is incorporated (and if applicable registered) •

ensure all communications sent by an officer of or on behalf of an organisation similarly record the fact of incorporation/registration.

Ensure any contracts entered into by trustees contain a clause that limits any personal liability to the assets of the trust. Ensure proper electoral or appointment processes are followed (note, for example, that s 43 of the Trustee Act 1956 currently requires changes of trustees to be effected by deed). In the case of trusts, ensure that retiring trustees get a release and indemnity from obligations incurred while they were trustees. When in doubt, seek professional advice. Verify indemnity. Verify adequate insurance (see chapter ¶4).

¶1714 Conclusion Not-for-profit organisations or NFPs play an important role in New Zealand society. Accepting a role as a member of a governing body of a NFP can be a rewarding way to help transform an organisation’s purposes into tangible outcomes for its communities. At the same time, it is very important that officers of NFPs understand their duties and obligations, and the legal framework under which they are operating.

Chapter 18: PUBLIC GOVERNANCE Editorial information Bill Frecklington

¶1801 Introduction Public governance in New Zealand relates to governing boards of state-owned or state-controlled entities. In New Zealand the core functions of government are implemented by public service departments, which are directly accountable to Ministers. Since the 1980s, successive New Zealand governments have devolved a range of operations to public entities. Those entities take a variety of forms, but the common feature is that they each have a separate legal identity and are accountable in the first instance to a board, rather than directly to Ministers. This chapter explains the role of those boards in providing governance of public entities on behalf of the state. This chapter uses the generic term “board member” to refer to any member of the governance board of a public entity. Depending on how the entity is established, board members may have a range of names (eg trustee, councillor, governor, director). Board members are generally appointed by a Minister of the Crown or by the Governor-General. A small number of positions are filled by election and others are appointed by stakeholders outside of government. In appointing board members, Ministers endeavour to bring together a group of people with diverse and complementary skills that will assist in managing the entity.

Public entities are established for a particular purpose by specific legislation. Sitting alongside that specific legislation, the Crown Entities Act 2004 provides the rules for governance of most entities (entities that are companies will also need to comply with the Companies Act 1993). Boards are required to operate within the parameters of the Crown Entities Act to achieve the broad policy aims developed for the entity itself by Ministers. Some entities are able to operate more independently from government than others in achieving their goals.

¶1802 Crown entities Crown entities are organisations established to sit outside Crown ministries and departments. They account for about 50% of government spending and make a major contribution to New Zealand’s economic and community welfare. Each Crown entity is established to take responsibility for a particular aspect of the Government’s operations. The Government, through the responsible Minister, will set the budget and broad objectives for each year, but the entity is given autonomy over the operation itself. The entity will be expected to maintain a high level of expertise amongst its staff and to develop its own methodology for delivering the Government’s objectives. Although each Crown entity will sit under the portfolio of a responsible Minister, the responsibility for governance of that entity will rest with a board. Crown entity boards are expected to function in a similar way to the board of directors of a company. Crown entity boards are appointed by the responsible Minister. Each entity will have its own legislation that will name the responsible Minister, fix the number of members on the board and any other requirements for the board’s composition (eg there may be requirements for particular expertise to be present on the board). When appointing board members, a Minister must follow the procedure set out in the Crown Entities Act (ss 28–33). The Act requires the same procedure to be followed for all board appointments, to ensure a consistent, fair and transparent approach.

The governing board is then responsible for appointing the chief executive officer (CEO), setting the strategic direction in line with the Minister’s expectations and ensuring the performance of the organisation. In some instances, the Governor-General has the responsibility for appointing the board members. Along with setting the rules for the appointment of board members, the Crown Entities Act provides a framework that governs all aspects of Crown entity management, including the duties of board members, financial management and reporting requirements. All Crown Entity board members and management need to have an understanding of the Act’s contents. There are five types of Crown entities detailed in s 7 of the Crown Entities Act: • statutory entities — bodies corporate established through legislation • Crown entity companies — previously known as Crown-owned companies • Crown entity subsidiaries — companies that are controlled by Crown entities • school boards of trustees — as constituted under the Education Act 1989, and • tertiary education institutions — universities, polytechnics and wānanga that have been established by the Government to deliver tertiary education. Each of the statutory entities has its own separate legislation and a responsible Minister, as well as being subject to the Crown Entities Act. Statutory entities Statutory entities, as bodies corporate established through legislation, can be Crown agents (CAs), autonomous Crown entities (ACEs) or independent Crown entities (ICEs). The essential difference between

the three types is the “distance from government” in each case — that is, the degree to which Ministers and departments can influence the operation of the entity. Crown agents Crown agent board members are appointed by the responsible Minister and are required to give effect to government policy. The requirement to give effect to government policy means that Crown agents are the entity type that is closest to Government. It is likely that the Board Chair and the CEO of a Crown Agent will have a close relationship, along with regular meetings, with the responsible Minister. In some cases, the operation of a Crown agent may appear to be quite similar to that of a core government department. Each of the Crown agents has its own unique legislation. Examples of Crown agents include: • New Zealand Qualifications Authority, which operates under the Education Act and the Industry Training and Apprenticeships Act 1992. Board members are appointed by and report to the Minister of Education. • WorkSafe New Zealand, which operates under the WorkSafe New Zealand Act 2013. The main objective of this organisation is to promote and contribute to securing the health and safety of workers and workplaces. It administers a range of legislation, including the Health and Safety at Work Act 2015. Board members are appointed by the Minister of Business, Innovation and Employment. • District Health Boards (DHBs). There are 19 regional populationbased DHBs, which are funded by central Government on a population-based funding system. Each DHB has its own website (eg www.tdhb.org.nz for Taranaki DHB and www.adhb.govt.nz for Auckland DHB). The guiding legislation is the New Zealand Public Health and Disability Act 2000. Each board can have up to 11 members: seven board members are elected by the region’s population on the same cycle as local government elections and up to four are appointed by the Minister of Health, who also

appoints the chair and deputy chair from among the 11 members. Autonomous Crown entities Autonomous Crown entity (ACE) boards are required to have regard to government policy. This gives them a greater degree of autonomy in their decision making than Crown agents. ACEs tend to include entities charged with the administration of the arts (eg Arts Council of New Zealand, New Zealand Film Commission), quasi-commercial organisations (eg Public Trust) and organisations that have been established to provide “independent policy” as a part of their functions (eg Retirement Commissioner). Independent Crown entities Boards of an independent Crown entity (ICE) cannot be directed by the responsible Minister, unless the direction is specifically provided for under an Act other than the Crown Entities Act. Almost all of these entities are charged with making policy and quasi-judicial decisions that affect the lives of citizens. The credibility of an ICE would be called into question if there was any public perception that Ministers could have any influence over its operation. The Commerce Commission, New Zealand’s primary competition regulation agency, is an example of an independent Crown entity. Board members are appointed by the Governor-General on the recommendation of the Minister of Commerce for their knowledge and experience (see the Commerce Commission New Zealand’s website at www.comcom.govt.nz). Crown entity companies Crown entity companies operate business enterprises owned by the Crown. The Crown entity company form is generally used where: a) a specific or defined purpose is intended for the company b) the overall objectives of the company are not solely commercial c) the Crown has no intention of selling any of the shares in the company.

Crown entity companies have three forms of guiding legislation: the Companies Act 1993, the Crown Entities Act 2004 and the Act that established and enables the Crown entity company. Being subject to the Crown Entities Act adds further reporting requirements and some restrictions on financial activities, meaning that these companies have slightly less independence in their activities than, say, a state-owned enterprise. All shares must be held by one or more Ministers, one of whom must be the Minister of Finance, which precludes Crown Entity companies from being sold. Directors can only be removed by shareholder resolution and Ministers do not have the power to direct Crown entity companies on policy, unless specially provided for in another Act. Under the Crown Entities Act, Crown entity companies can be subject to whole of government directions (eg a whole of government direction may be that the Crown entity company must comply with an e-government requirement designed to improve public sector effectiveness). Examples of Crown entity companies are New Zealand Venture Investment Fund Ltd, Radio New Zealand Ltd and the seven Crown Research Institutes (eg AgResearch Ltd). Crown entity subsidiaries Crown entity subsidiaries are companies controlled by Crown entities. Crown entities may establish one or more subsidiaries, either partly or fully owned, to carry out specific functions to assist the parent entity to achieve its objectives. The parent entity is accountable for every subsidiary and must ensure these are reported in the parent entity’s end-of-year results. The parent Crown entity is responsible for ensuring good governance practices in the subsidiary company. The pertinent legislation is threefold: the Crown Entities Act, which states that each subsidiary is a Crown entity, the Companies Act and the parent Crown entity’s enabling legislation. All Crown entities (other than a corporation sole, which has only one office holder) are able to create or obtain Crown entity subsidiaries, subject to advising the responsible Minister.

An example of a Crown Entity subsidiary is Hobsonville Land Company Ltd, which is a wholly-owned subsidiary of Housing New Zealand Corporation. It was set up as a commercial venture to develop former defence land at Hobsonville in West Auckland. School boards of trustees All of New Zealand’s state and state-integrated schools have a board of trustees (BOT). The BOT is the Crown entity responsible for the governance and the control of the management of the school. The board is the employer of all staff in the school, is responsible for setting the school’s strategic direction in consultation with parents, staff and students, and ensuring that its school provides a safe environment and quality education for all its students. Elections for BOT trustees are held every three years or when a trustee resigns during his or her term of office. Boards comprise the principal, a staff representative, a student representative in schools with students above year 9 and three to seven parent representatives, who are elected by the parents of students attending the school. Boards of integrated schools are slightly different from state school BOTs as they have up to four proprietors who are responsible for the school buildings. Integrated schools are often church-owned schools which retain ownership of the land and buildings, while the State pays the salaries of the teaching staff. Serving on a school board of trustees is both challenging and rewarding and can be a good way to start a public governance career. Tertiary education institutions Universities, institutes of technology (or polytechnics) and wānanga are state-owned tertiary education institutions (TEIs). New Zealand has eight universities, 18 institutes of technology or polytechnics (ITPs) and three wānanga. Universities and wānanga have a greater degree of independence and are expected to be leaders of intellectual thought and research, with wānanga focused on the application of knowledge regarding āhuatanga Māori (Māori tradition) according to tikanga Māori (Māori custom). ITPs provide a more vocationally based education, but also offer degree level

courses and undertake research. Each TEI is governed by a council, the makeup of which is described in s 171 of the Education Act. The Minister of Education appoints four members to each council. For universities and wānanga, the other council members are determined by the individual TEI’s constitution. ITP councils have a more prescribed composition of eight (four appointed by the Minister and four by the Council itself). It is possible for more than one ITP to be governed by the same council. TEIs are covered by the Crown Entities Act, but their governance is more independent than most entities. They are responsible in the first instance to the Tertiary Education Commission, an overarching Crown entity that administers the Crown’s tertiary education policy and allocates Crown funding to TEIs.

¶1803 State-owned enterprises State-owned enterprises (SOEs) are companies established under the State-Owned Enterprises Act 1986. Shares in SOEs are jointly held by the Minister for SOEs and Minister of Finance, with those Ministers responsible for making all board appointments. The SOE board appointment process is administered by the Treasury through its Commercial Operations team. The SOEs are controlled by the State-Owned Enterprises Act, the Companies Act 1993 and any enabling legislation. SOEs operate enterprises that are entirely commercial and the State-Owned Enterprises Act provides that SOEs have a principal objective to operate as a successful business. As a result, they are the form of Crown-owned organisation that operates with least influence from the Government. Examples of SOEs include New Zealand Post Ltd and AsureQuality Ltd.

¶1804 Companies established under the Public Finance Act 1989 There are a range of companies established by the Crown under the

Public Finance Act, which are listed in sch 4A of that Act. Most of these companies are set up to provide a service or undertake a project that private sector companies might not view as commercially viable. The advantage of establishing companies in this manner is the flexibility it affords in disposing of all or part of the company. Many of the companies listed in sch 4A are intended to have a limited lifespan. For others, it may be helpful to have the option of selling all or part of the shareholding to a third party. Although they are not Crown entities, a range of provisions of the Crown Entities Act 2004 are deemed to apply. Board members of sch 4A companies are appointed by shareholding Ministers. Examples of such companies are Southern Response Earthquake Services Ltd (established to administer the Canterbury earthquake related claims that remained with the Crown following the sale of AMI Insurance) and Crown Fibre Holdings Ltd (established to fill a perceived gap in the market for provision of ultrafast broadband services).

¶1805 Local government Local government is the process for managing and providing social, economic, environmental and cultural resources to the local community through democratic decision making as defined in the Local Government Act 2002. New Zealand has 78 local authorities, although mergers are planned for some. The current local authorities comprise: • 12 city councils • one Auckland Council (an amalgamation of eight councils that took place in November 2010) • 54 district councils (also known as territorial authorities), six of which also have the powers of a regional council and are called unitary local authorities, and • 11 regional councils.

Each local authority has local boards and wards (ie specific areas designed to ensure community recognition within the district), which allow for further community input into specific areas and functions. For example, the Auckland Council has 21 local boards whose representatives are elected to assist with decisions at the community level. Local boards and wards must take into account communities of interest and local service delivery. The number of local wards usually depends on the ratio of elected members for the total electorate. Regional councils are responsible for the sustainable well-being of the region, including the management of freshwaters, land, air and coasts. Policy statements and the issuing of regional consents are part of the main purpose of regional councils. Their guiding statutes are the Resource Management Act 1991, the Biosecurity Act 1993 and the Local Government Act. Councillors must also be familiar with a range of other legislation affecting decision making. Elections for local government positions are held every three years. Council candidates must be resident in the area. The Local Government Act is the guiding legislation. Each district council and city council is run by a mayor who is separately elected by the residents of the designated district or city. Regional councils have a chair who is appointed by the elected councillors. Further information about local government can be found at www.localcouncils.govt.nz or through contact with The Department of Internal Affairs at www.dia.govt.nz. Council-controlled organisations Many local authorities have devolved certain operations to subsidiary organisations; in much the same way that central Government has done through the establishment of Crown Entities. Council Controlled Organisations (CCOs) are set up in similar manner to Crown entities with governing boards. Most are wholly owned by the relevant local authority or ownership is shared by two or more authorities. A subset of the CCO is the CCTO (Council Controlled Trading Organisation), which operate trading enterprises with the purpose of making a profit. Examples of CCTOs are Auckland Tourism Events and Economic

Development Ltd (ATEED), Wellington Water Ltd (water treatment and supply company jointly owned by five local authorities in the Wellington region) and Dunedin International Airport Ltd (jointly owned by the Dunedin City Council and the Crown). Council Controlled Organisations are another source of potential public governance roles. Each authority will have its own appointment process, but ultimately the responsibility for board membership will be with councils.

¶1806 Removal of Board Members It is rare for Ministers to use the law to force the removal of members of board that they have appointed. In many cases, the member concerned will see that continued involvement on the board would be inappropriate and they elect to resign on their own terms. Ministers do retain the right to remove board members. In most instances, particularly for the companies, Ministers have an absolute right to remove members simply by written notice, with no reasons required to be given. To avoid any doubt, the appointment process for Crown company board members has often included a requirement for the appointee to acknowledge the Minister’s right to remove at any time.

Figure 18.1: Requirements for Removal by Ministers of Public Entity Board Members Board Member Category

Removal requirement

Crown Entity: Crown Agent, appointed member

Minister may remove a member at any time and entirely at his or her discretion. No reason required to be given.

Crown Entity: Autonomous Minister may remove a member Crown Entity, appointed member at any time and for any reason that in the Minister’s opinion

justifies the removal. The reason/s must be given. Crown Entity: Elected members of Crown agents and autonomous Crown entities

Minister may remove a member at any time for just cause. The reason/s must be given.

Crown Entity: Independent Crown Entity

Governor-General may remove a member at any time and for any reason on the advice of the responsible Minister given after consultation with the AttorneyGeneral. The reason/s must be given.

Company board member: (SOE; Crown entity company; Public Finance Act, sch 4A)

Removal by ordinary resolution of shareholders, subject to the provisions of the company’s constitution.

The term “just cause”, in relation to the removal of elected members and ICE members, is defined in the Crown Entities Act and includes misconduct, inability to perform the functions of office, neglect of duty, and breach of any of the collective duties of the board or the individual duties of members (depending on the seriousness of the breach). Under the Crown Entities Act, the removal of a board member can be undertaken with no particular formality or procedure, other than being submitted to the member in writing. However, the Minister’s actions in carrying out the removal must reflect the principles of natural justice and proper consideration of the matter. There is an implication that the actual decision to remove a member must also reflect such principles. As noted above, there have been few instances in which Ministers have been required to invoke the removal provisions of the Crown Entities Act in order to force a board member to go. In general, board members recognise when continued membership of a board would be inappropriate and they resign without the need for the Minister to act. Board members have resigned from Crown Entity boards because of:

• personal disagreement with a proposed collective decision of the board • personal disagreement with the broad policy settings under which Ministers have required an entity to operate • changed circumstances in the board member’s business or personal affairs have created a conflict or perceived conflict that would be too difficult to manage • a board member or family member taking employment that would be incompatible with the operations of the Crown entity or company • events in the board member’s personal life that may be unrelated to the entity itself, but have potential to embarrass the entity or the Minister.

¶1807 Board success and failure Determining whether a board has been successful is difficult to measure. In SOEs or Crown entities with a commercial focus, profitability is the clear proxy measure for the board’s success. For non-profit entities, success will be measured against the expectations set by the Minister for the organisation. In both cases, responsibility for the outcomes, both good and bad, will ultimately rest with the board. For that reason, the work of a board is a difficult one, with board members’ involvement in the organisation generally limited to meetings and the material provided in board papers. Any decision to accept appointment to a board should, therefore, be considered carefully. Boards are most effective when there is an appropriate balance of skills in the membership, sound and fair leadership from the Chair and a group willing to engage in robust but respectful debate of the issues. Weakness in any one of those attributes can lead to a dysfunctional board. Board dysfunction can quickly filter down to the organisation itself, leading to poor performance. Inevitably, this will develop into a

loss in confidence by the Minister and the public in the organisation’s ability to manage public assets and implement government policy. Ministers are assisted in their scrutiny of Crown entities by officials from Ministries and Departments in the core public sector. The work of officials is more than a process of policing the achievement of key performance indicators. Monitoring officials can also provide input and advice from their own experience of working in the subject area and equally can be a source of information about the views of Ministers. The monitoring process should, therefore, be embraced by boards as a source of assistance in their deliberations. Consequences of the perceived failure of public sector boards can be significant. Examples in the commercial sector have been the failure of SOEs Solid Energy New Zealand Ltd and Learning Media Ltd. In other entities, the ultimate sanction for failure is for Ministers to take governance out of the hands of the board and placed in the hands of Government-appointed Commissioners. This action has been taken in health (Hawke’s Bay and Southern District Health Boards), local government (Canterbury Regional Council or ECan) and a range of tertiary education institutions and school boards of trustees.

¶1808 Public governance board process Induction Induction is an important process for all board members new to the organisation, whether they are experienced in governance or not. Induction allows new board members to better understand the organisation they are governing, the place it has in the wider government sector, its interrelationships with other departments, boards and Ministries, and the Minister’s expectations of the organisation. Board governance manuals Figure 18.2 below outlines the information that should be included in a board governance manual. The manual describes the policies and processes that will guide directors and give information about the organisation. If the organisation does not have a board manual,

members should ask to see the human resources manual or the quality framework policy manual to learn about the organisation’s operating procedures, which reflect the culture of the organisation.

Figure 18.2: Contents of Board Governance Manuals 1. Relevant legislation 2. Outline of government policy related to the Crown Entity 3. Objectives, functions and powers of Crown entities 4. Constitution and Board Charter, if applicable 5. Copies of entity’s core planning documents, such as Statement of Intent 6. Key relationships 7. Collective and individual duties of board members 8. Role of the chair 9. General behaviours of board members 10. Conflicts of interest, disclosure and management 11. Gifts and hospitality 12. Board meeting procedures 13. Board committees 14. Delegations 15. Subsidiaries’ procedures and reporting 16. Planning and reporting 17. Board member performance evaluation Conflicts of interest The State Services Commission booklet “Board Appointment and

Induction Guidelines” contains a thorough section on how to identify and manage a conflict of interest. A conflict of interest can have two outcomes. The first is that the conflict is so strong that the person cannot be appointed to the board. More often the conflict can be managed and the appointment can be made. Conflicts of interest are common among members of public boards and must be declared as early as possible to avoid a situation where a director may become compromised. The general consensus on governance regarding conflicts of interest is that directors should be acting for the good of the organisation they represent and not in their own self-interest. Impartiality, honesty and good faith are the key phrases used by the State Services Commission in its advice to board appointees (see www.ssc.govt.nz/board-appointment-guidelines). “Good faith” means that directors are obliged to act at all times in the best interests of the entity they are appointed to govern, “honesty” refers to the requirement for directors to act at all times in a truthful manner and “impartiality” refers to the principles of fairness and objectivity that should guide board members’ treatment of other board members, employees or associates of the entity (eg access to information or to goods and services should not favour any particular individual or organisation). Conflicts of interest must be addressed promptly The process for declaring a conflict of interest will be detailed in the members’ induction manual, usually available to all new board members. It cannot be emphasised too strongly that if any conflict of interest develops, it must be raised with the board chair as soon as the director becomes aware of it. See chapter ¶2 for more information on conflicts of interest. Communication One of the key aspects of serving on a public board is that board members are responsible for publicly owned assets and funding. The appointment will be either a direct appointment by a Minister or the

new board member will have been elected by the public. In both situations, the board member is responsible directly or indirectly to a Minister. The Minister expects a climate of “no surprises”. At the same time, members of the public will have a strong sense of ownership over the entity and will their own scrutiny over the entity’s operations. Board members should not be tempted, for example, after a particularly difficult board meeting perhaps dealing with controversial funding decisions to pass these on to the media. From time to time, the media will ring board members. The general rule is that the chair is the spokesperson, and permission to speak with the media should be first cleared through the chair. The board should show a united front, focusing on collective responsibility. Disagreement between board members should not be played out in the media. New board members should be aware that, while it can be seductive to see one’s name in print, publicity can have unintended consequences. A board member’s casual comment may be misinterpreted, so it is best not to speak to the media unless the chair has given permission and instructions on what to say. In committee section District health boards and some other Crown entities are legislated to hold meetings in public, which means that the media may be present. There are times when the board needs to review an agenda item without the scrutiny of the public. These occasions usually involve draft reports or statements of intent not yet approved by the Minister or commercially sensitive planning papers. At this point, the board will go into committee, which means that the public is excluded and the reports and minutes are not available to the public. Board members must remember this and make sure they do not accidentally disclose the content of in committee reports or decisions until they are approved to be made public. A motion must be passed to allow a public board to go into committee. There are specific words that must be used to move into committee and these will be detailed in the board manual. Boards of other public entities (eg state-owned enterprises (SOEs)) are not required to hold their meetings in public because much of the

governance is commercially sensitive. When a member of the public requires information, he or she can make a request under the Official Information Act 1982. Conclusion Public governance roles are a key element of both the economic prosperity and social wellbeing of New Zealand and its citizens. This wide-ranging involvement across society means that there are many opportunities for people from across all disciplines to contribute to public governance in some way. The range of motives for people to participate in public governance are also many. Some will be seeking to develop governance experience in order to take their skills to a more demanding level, possibly in the commercial sector. However, others will have no desire to join a commercial board, yet are able to make a strong contribution by applying their experience of public sector management or their knowledge of specific subject areas (health, education, justice, etc). At the same time, the skills of people in the commercial world are highly relevant and helpful in public governance; and experienced company directors have enjoyed adapting the disciplines of the commercial world to public life. There are, therefore, opportunities for anyone with skills to join the public governance system; it is more a matter of finding the appropriate level that suits the skillset and experience of the individual. Not everyone will be able to contribute to the governance of an SOE, as these are large and complex businesses. However, membership of a community based group, such as a Lotteries Grants Board, Conservation Board or sector advisory committee, can be just as valuable. Few of these public governance roles are well paid, as the concept of a “public service discount” with regard to board fees is a well-established principle. But almost all find them to be both stimulating as well as challenging. Most of the material in this book will apply equally to public governance as it does to commercial governance. The public arena offers a vast number of roles and people are always being sought by Ministers. Governments need to have the widest possible pool of

talent from which to choose. It is, therefore, important that you make your interest known. Unfortunately there is no single place to register such interest. The Commercial Operations Group at The Treasury operates a comprehensive database that can be accessed online at www.boardappointments.co.nz. Although focused on commercial roles, the Treasury database is also used to provide suggested candidates for the full array of government boards. If you have an interest in a particular sector, it will be possible to seek out officials in the relevant department who deal with board appointments. If the designation applies, you can also signal your interest to the Ministry for Women, Te Puni Kokiri (Ministry for Māori Development) or Ministry for Pacific Island Affairs. Roles will not necessarily be available immediately, you do need to be patient, but readers are encouraged to take these steps and make their skills available.

INDEX Index A Abandonment of employment dismissal

¶909

Accident causing injury claims insurance contracts

¶403

— legal costs

¶403

— occurrence of an event and making a claim

¶408

Accident compensation regime

¶512

Accredited Employers Programme

¶512

levies

¶512

safety management programmes

¶512

Accounting policies

¶307

Accredited Employers Programme

¶512

Actions against directors creditors’ application for repayment or remedy

¶109

derivative actions

¶104

Activity ratios

analysing financial statements Ad hoc committees Adverse events insurance

¶308; ¶309 ¶1007 ¶403

Adverse opinion audit findings

¶707

Agenda annual meetings

¶809

— availability of annual report

¶811

— notice irregularities

¶811

— notice contents

¶809

— notice period

¶811

— service of notice

¶810

board meetings

¶1002

— Board-only time

¶1002

— exception reporting

¶1002

— Interests Register updates

¶1002

— late items

¶1002

— notice contents

¶1002

— notice period

¶1002

— service of notice

¶1002

identifying and disclosing conflicts of interest

¶205

Agents responsibility for tax returns

¶605

Agreed value insurance

¶404

Annual meetings

¶801

alternative reporting requirements

¶803

— opt-in or opt-out period

¶811

casting votes

¶812

chairperson

¶812

constitutional requirements

¶802

corporate documents, availability

¶812

counting votes

¶812

date of meeting and relevant notice period

¶808

joint shareholders’ votes

¶812

legal framework

¶802

majority of 75 per cent rule — exceptions

¶805

matters for discussion

¶806

minutes

¶812

notice requirements

¶809

— availability of annual report

¶811

— irregularity in notice

¶811

— notice period

¶811

— service of notice

¶810

professional advisor’s attendance

¶812

proxy votes

¶812

quorum

¶812

resolutions — in lieu of meeting

¶804

— ordinary resolutions

¶812

— special resolutions

¶812

shareholders’ rights

¶807

voting rights

¶812

Annual reports alternative reporting requirements

¶803

— opt-in or opt-out period

¶811

availability prior to annual meeting

¶811

Board Charter

¶118

failure to prepare and send

¶108

Annual returns filing with Companies Office

¶1204; ¶1205

Arbitration employment relationship problems

¶908

Arts Council of New Zealand

¶1802

AsureQuality Ltd

¶1803

Auckland Tourism Events and Economic Development Ltd

¶1805

Audit Committee terms of reference

¶709

Auditing

¶302; ¶701

assessment of internal controls

¶706

audit, defined

¶702

audit findings — audit opinion

¶707

— management letter

¶707

— Plan to Remedy

¶708; ¶1503

auditor, defined

¶701

control tests

¶703

engaging an auditor

¶704

external and internal audits compared

¶702

financial audits

¶702

— alternative reporting requirements

¶803

— audit evidence

¶703

— information to be disclosed

¶705

— materiality

¶703

— opt-in or opt-out period

¶811

— Plan to Remedy

¶708

FMC reporting entities

¶702

governance audits

¶702; ¶1501

— audit process

¶1503

— Board evaluation

¶1504

— Board evaluation process

¶1505

— director evaluation

¶1505

— Governance Audit and Plan to Remedy

¶1503

— New Zealand principles

¶1502

health and safety audits

¶702

human resources audits

¶702

— Plan to Remedy

¶708

legal framework

¶702

letter of engagement

¶704

licensed auditor, defined

¶702

procedure

¶703

prospective financial information

¶702

substantive tests

¶703

what are auditors looking for?

¶705

Australian overseas companies registration

¶1203

Australian Securities and Investments Commission (ASIC)

¶1203

Autonomous Crown entities

¶1802

B Balance sheet

¶303

accounting policies

¶307

notes to the account

¶307

Barker, S

¶1702

Bennis, Warren

¶1304

“Best interests” rule

¶105

exceptions

¶105

Board Annual Work Plan Board Code of Conduct

¶120 ¶1010

Charter — see Board Charter companies established under Public Finance Act

¶1804

Crown entities — see Crown entities governance audits

¶702; ¶1501

— audit process

¶1503

— Board evaluation

¶1504

— Board evaluation process

¶1505

— director evaluation

¶1505

— Governance Audit and Plan to Remedy

¶1503

— New Zealand principles

¶1502

governance policies

¶1008

— audits

¶702; ¶1501

— digital leadership and transformation

¶1406; ¶1407

— direct and govern technology-enabled strategy, defined

¶1407

— governance without exception

¶1405

— information technology governance

¶1404; ¶1405

governance templates — Board Code of Conduct

¶1010

— Board Expenses Policy

¶1010

— Delegations of Authority

¶1010

— Director Induction

¶1010

— Directors’ Duties

¶1010

— Duties of the Chair

¶1010

— Human Resources Committee Terms of Reference

¶1010

— Protected Disclosures Policy and Procedures

¶1010

— Resolutions Register

¶1009

meetings — see Board meetings not-for-profit organisations — see Not-for-profit organisations State-owned enterprises

¶1803

Strategy Monitoring Guide

¶1312

Board Annual Work Plan

¶120

Board Charter

¶118; ¶1005

meeting rules (standing orders)

¶1005

Board committees

¶1007

ad hoc committees

¶1007

documented Terms of Reference (TOR)

¶1007

Human Resources Committee Terms of Reference

¶1010

standing committees

¶1007

Board meetings

¶1001

agenda

¶1002

— late items

¶1002

attendance

¶1002

— apologies

¶1002

board committees

¶1007

— Human Resources Committee Terms of Reference

¶1010

— standing and ad hoc committees compared

¶1007

board papers and discussion

¶1004

— decision-making procedures

¶1004

board-only time

¶1002

CEO-capture situations

¶1002

chairing the meeting

¶1006

financial reporting

¶1002

— exception reporting

¶1002

governance templates — Board Code of Conduct

¶1010

— Board Expenses Policy

¶1010

— Delegations of Authority

¶1010

— Director Induction

¶1010

— Directors’ Duties

¶1010

— Duties of the Chair

¶1010

— Human Resources Committee Terms of Reference

¶1010

— Protected Disclosures Policy and Procedures

¶1010

— Resolutions Register

¶1009

Interests Register updates

¶1002

meeting rules (standing orders)

¶1005

— board decision-making

¶1005

— conventional and consensus-based meeting rules compared

¶1005

— electronic decision-making

¶1005

— Terms of Reference document (Charter)

¶1005

minutes

¶1003

— matters arising

¶1002

— minutes of previous meeting

¶1002

new business

¶1002

notice requirements

¶1002

— notice irregularities

¶1002

quorum

¶1002

resolutions

¶1005

— resolutions in lieu of meeting

¶1005

— Resolutions Register

¶1002; ¶1009

voting rights

¶1005

— silence

¶1005

Board Strategy Monitoring Guide

¶1312

Branch societies

¶1703

Budgets/forecasts — see Prospective financial information Business interruption insurance

¶403

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Business restructuring consultation obligations

¶905; ¶909

negotiated exits

¶909

redundancies

¶909

Business strategy — see Strategic business planning Business values statement

¶1303; ¶1307

establishing values

¶1307

measurable business values

¶1307

ship wreck method of establishing values

¶1307

SMART objectives

¶1306

values enabling company success

¶1307

C Ceasing to carry on business — see Full or partial closure of business

CEO review committee

¶907

Chairperson annual meetings

¶812

board meetings

¶1006

— bullying or intimidating behaviour

¶1006

— countering harmful influences

¶1006

— directive and participative leadership compared

¶1006

— duties of the Chair

¶1006; ¶1010

— facilitation of decision-making process

¶1006

Charitable companies

¶1703

Charitable trusts

¶1701; ¶1703; ¶1714

— see also Incorporated societies; Not-for-profit organisations annual meetings

¶801

characteristics of NFP entities

¶1703

charitable purpose, defined

¶1703

constitution checklist

¶1707

deregistration issues

¶1702

duty in relation to obligations

¶1708

duty of care

¶1708

duty of loyalty

¶1706

duty of obedience

¶1707

financial audits

¶702

financial reporting

¶1702

— External Reporting Board standards

¶1702

— Public Benefit Entity Simple Format Reporting — Accrual (Not-For-Profit)

¶1702

— service performance report

¶1702

governance

¶1701; ¶1702; ¶1704

— charities regulator

¶1704

— composition of the board

¶1704

— conflicts of interest

¶1702; ¶1706

— duties of governance

¶1705

— governance and management compared

¶1704

— governing bodies

¶1704

— policies and procedures

¶1704

— understanding obligations of office

¶1704

governance audit

¶1503

health and safety

¶1702

incorporation

¶1703

Interests Register

¶205

legal framework

¶1702

— proposed reforms

¶1702

member participation decreasing

¶1702

operational challenges

¶1702

personal liability

¶1713

reckless trading

¶1708

regulatory issues

¶1702

special events insurance

¶403

taxation obligations

¶601

— responsibility for returns

¶605

types of NFP entities

¶1703

unauthorised profits

¶1706

Charities Registration Board

¶1702

Charities Services Ngā Rātonga Kaupapa Atawhai

¶1702

Chief executive officers (CEOs)

¶901

appointment

¶902

checklists

¶909

dismissal

¶909

duty of good faith

¶905

employer obligations

¶904

employment agreement provisions

¶903

employment relationship problems

¶908

end of relationship

¶909

— communicating CEOs exit

¶909

health and safety

¶904

holiday and leave entitlements

¶904

managing and maintaining the relationship

¶905

managing conflict

¶908

misleading and deceptive behaviour

¶905

negotiated exits

¶909

performance management

¶903; ¶907

privacy obligations

¶904; ¶906

protected rights

¶904

records and information

¶906

recruitment

¶902

redundancy

¶909

remuneration

¶902

resignation

¶909

status as an employee

¶902

stress management

¶904

whistle-blowing

¶706; ¶904

Civil liability

¶116

non-compliance with Act or Constitution

¶108

Commerce Commission

¶1802

Commercially used marine vessels specialist assets insurance

¶403

Common law directors’ duties

¶102

society officers’ duties

¶101

trustees’ duties

¶101

Companies community engagement and CSR programmes

¶1604

Companies Office information — information available

¶1202

— online information

¶1202

— searches

¶1202

— updating information

¶1204

filing annual returns

¶1204; ¶1205

filing financial statements

¶1206

— balance date

¶1206

— exclusions

¶1206

— group exclusions

¶1206

— inactive entities

¶1206

— “large” companies

¶1206

inactive entity, defined

¶1206

incorporating a New Zealand company

¶1203

— reservation of company name

¶1203

large, defined

¶1206

maintaining company records

¶1207

obligations

¶110

overseas companies — see Overseas companies records to be kept at registered office

¶1207

— share register, exception

¶1207

tax registration

¶1203

Companies Act 1993 directors’ duties

¶102

— fiduciary duties

¶104

non-compliance

¶108

Companies Office

¶1201

directors details

¶1202

filing annual returns

¶1205

filing financial statements

¶1206

— balance dates

¶1206

— exclusions

¶1206

— group exclusions

¶1206

— inactive entities

¶1206

— “large” companies

¶1206

inactive entity, defined

¶1206

incorporating a New Zealand company

¶1203

information available

¶1202

— online information

¶1202

— searches

¶1202

— updating information

¶1204

large, defined

¶1206

maintaining company records

¶1207

overseas companies — see Overseas companies records to be kept at registered office

¶1207

register of companies — see Companies Register tax registration

¶1203

Companies Register

¶1201

company name search

¶1203

Company information, use of

¶114

Company name

¶1203

Company officers health and safety — due diligence obligations

¶504

insurance and indemnity

¶403; ¶407

— key policy elements

¶407

— occurrence of an event and making a claim

¶408

— proposal document

¶406

— purchasing insurance

¶404

— renewing the policy

¶409

Comparative analysis analysing financial statements

¶308

Confederations

¶1703

Confidential information — see also Disclosure of information employment agreement provisions Conflicts of interest

¶903 ¶105; ¶113; ¶201

— see also Pecuniary interests actual or perceived conflict charities

¶202 ¶1702; ¶1706

checklist

¶209

conflict of interest policy

¶205

defined

¶202

employment agreement provisions

¶903

ethical behaviour

¶201

interested, defined

¶113

Interests Register — see Interests Register managing conflicts, process

¶113; ¶204

— appropriate non-participating action

¶207; ¶208

— conflict disclosed after decision made

¶208

— identifying conflicts

¶205

— relationships that are conflicts

¶206

— transparent, rigorous and fair process

¶207

legal advice

¶208

meeting agenda item

¶205

no personal benefit

¶203

public boards

¶1808

society officers

¶113

trustees

¶113

Consequential loss insurance

¶403

Constitution annual meetings

¶802

changes

¶117

checklists

¶117

default Constitutions incorporated societies

¶117 ¶1703

insurance contracts

¶404

non-compliance

¶108

Consultation requirements

¶905

Contract of insurance — see Insurance contracts Contractors health and safety obligations

¶502

— consultation with other PCBUs

¶503

insurance contracts

¶403; ¶404

— insurer’s rights of subrogation

¶407

— key policy elements

¶407

— legal obligations

¶405

— occurrence of an event and making a claim

¶408

— proposal document

¶406

— purchasing insurance

¶404

— renewing the policy

¶409

— single project liability insurance

¶403

Corporate governance statement

¶119

Corporate social responsibility (CSR) programmes

¶1604

Council Controlled Organisations

¶1805

Council Controlled Trading Organisations

¶1805

Court orders health and safety infringements

¶506; ¶510

Credit hazards risk management

¶1102

Creditor days analysing financial statements

¶308

Criminal liability

¶116

non-compliance with Companies Act or Constitution

¶108

non-compliance with Health and Safety at Work Act

¶506; ¶511

Cross-sectional (comparative) analysis analysing financial statements

¶308

Crown agents

¶1802

Crown entities

¶1802

Crown entity companies

¶1802

Crown entity subsidiaries

¶1802

school boards of trustees

¶1802

statutory entities

¶1802

— autonomous Crown entities

¶1802

— Crown agents

¶1802

— independent Crown entities

¶1802

tertiary education institutions

¶1802

Crown Fibre Holdings Ltd

¶1804

Crown Research Institutes

¶1802

Current assets and liabilities balance sheet

¶303

Current ratio analysing financial statements

¶308

Customer Relationship Management (CRM) software

¶1403

Cyber security attack (hack)

¶1403

D Damages exemplary or punitive damages — insurance contracts

¶407

Data loss or failure of computer-related equipment insurance cover

¶407

— occurrence of an event and making a claim

¶408

Debt to equity ratio analysing financial statements

¶308

Debtor days analysing financial statements

¶308

Decision-making procedures

¶1004

collective decision-making

¶1004

decision-making procedures policy Deemed directors

¶1004 ¶103

Defective products, recalls insurance contracts

¶403

— key policy elements

¶407

— legal obligations

¶405

— occurrence of an event and making a claim

¶408

— proposal document

¶406

— purchasing insurance

¶404

— renewing the policy

¶409

Defending legal proceedings — see Legal costs Defined terms applications software

¶1403

audit

¶702

auditor

¶701

balance sheet

¶303

charitable purpose

¶1703

company information

¶114

conflict of interest

¶202

current assets and liabilities

¶303

cyber security

¶1403

direct and govern technology-enabled strategy

¶1407

direct costs

¶304

director

¶103

entitled to vote and voting

¶812

equity

¶303

fiduciary relationship

¶104

financing activities

¶306

fixed asset

¶303

goodwill

¶303

governance

¶1704

gross margin

¶304

grossly disproportionate

¶502

hardware hazard

¶1403 ¶502

inactive entity

¶1206

indirect costs

¶304

information governance

¶1403

information security

¶1403

intangible assets

¶303

internally generated goodwill

¶303

interested

¶113

investing activities

¶306

just cause

¶1806

large

¶1206

material information/materiality mission net profit after tax

¶407; ¶703 ¶1305 ¶304

net profit before tax

¶304

notifiable event

¶510

officer

¶1710

operating activities

¶306

ordinary resolution

¶812

records

¶609

risk

¶502; ¶1102

risk management

¶1102

small business

¶410

software

¶1403

special resolution

¶812

stakeholder

¶1602

statement of cash flows

¶306

strategy

¶1302

subrogation

¶407

systems software

¶1403

technology governance

¶1403

term liabilities

¶303

vision Delegation of authority

¶1304 ¶111; ¶1010

Department of Internal Affairs — Charities Services Ngā Rātonga Kaupapa Atawhai

¶1702

Deregistration charities

¶1702

— New Zealand Rowing Assn Inc

¶1702

— Swimming New Zealand Inc

¶1702

Derivative actions

¶104

non-compliance with Act or Constitution

¶108

Directors deemed directors

¶103

defined

¶103

director-employees

¶106

duties and obligations — see Directors’ duties governance audit

¶1501

— director evaluation

¶1505

health and safety obligations — see Health and safety insurance and indemnity — see Insurance contracts passive directors

¶103

personal liability

¶101

Directors’ duties

¶101; ¶1010

application of Companies Act 1993

¶102

deemed directors

¶103

delegation

¶111

documentation or paper trail

¶110; ¶116

fiduciary duties

¶104

— duty of care

¶111

— exercise of powers for proper purpose

¶107

— exercise of powers in relation to employees

¶106

— in relation to obligations

¶110

— reckless trading

¶109

— to act in good faith and best interests of company

¶105

— to comply with Companies Act and Constitution

¶108

— transactions involving self-interest

¶113

— use of company information

¶114

— use of information and advice

¶112

health and safety — see Health and safety other than fiduciary duties

¶115

passive directors

¶103

Disclaimer of opinion audit findings

¶707

Disclosure of information — see also Confidential information conflicts of interest — see Conflicts of interest governance practices

¶119

insurance contracts

¶402

— occurrence of an event and making a claim

¶408

— proposal document

¶406

— renewing the policy

¶409

— withholding information

¶406

protected disclosures public boards

¶706; ¶904; ¶1010

— in committee motions

¶1808

— media releases

¶1808

use of company information

¶114

voluntary disclosures — errors in tax returns

¶608

Discrimination employers’ obligations

¶904

Dismissal

¶909

Disputes resolution chief executive officers (CEOs) — complaints about

¶908

— in-house investigations

¶908

— private dispute facilitators

¶908

— public dispute resolution institutions

¶908

Commissioner of Inland Revenue

¶610

— expert advice

¶609; ¶610

— time frames

¶610

Employment Court

¶908

Employment Relations Authority

¶908

Insurance and Savings Ombudsman

¶410

Mediation Service

¶908

— records of settlement

¶908

not-for-profit organisations

¶1712

settlement agreements District Health Boards (DHBs)

¶908 ¶1802

Dividends equity statement Documentation or paper trail Donaldson, S

¶305 ¶110; ¶116; ¶208 ¶1704

Donations or government funding disclosure of interests

¶113

Drucker, Peter

¶1701

Dunedin International Airport Ltd

¶1805

Duty of care

¶111

directors

¶111

— delegated duties

¶111

not-for-profit organisations Duty of good faith

¶1708 ¶105; ¶905

E Earnings before interest and tax (EBIT) income statement (profit and loss account) Earnings before interest, tax, depreciation and amortisation (EBITDA)

¶304

income statement (profit and loss account)

¶304

Earthquake insurance

¶403

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Electronic decision-making, meetings

¶1005

Electronic information — see Information technology governance Electronic records records, defined

¶609

retention periods

¶609

tax obligations

¶609

Employee participation programmes health and safety at work

¶508

Employees full or partial closure of business

¶106

health and safety obligations

¶505

holiday and leave entitlements

¶904

protected rights

¶904

whistle-blowing

¶706; ¶904

Employers employees’ protected rights

¶904

health and safety obligations

¶904

holiday and leave obligations

¶904

Employment agreements chief executive officers (CEOs) — additional provisions

¶903

— confidentiality obligations

¶903

— conflicts of interest

¶903

— discrimination

¶904

— false or misleading representations

¶903

— health and safety

¶904

— holiday and leave entitlements

¶904

— mandatory provisions

¶903

— non-solicitation

¶903

— performance assessments

¶903

— physical and psychological hazards

¶904

— privacy obligations

¶904

— protected rights

¶904

— relationship reviews

¶903

— restraint of trade provisions

¶903

— stress

¶904

— variations to agreements

¶903

— whistle-blowing

¶706; ¶904

Employment Court

¶908

Employment-related insurance

¶403

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Employment Relations Authority

¶908

Employment relationship problems

¶908

Enforceable undertakings health and safety notices

¶511

Equity balance sheet

¶303

Equity statement

¶305

accounting policies

¶307

notes to the account

¶307

Ethical behaviour conflicts of interest

¶201

ExcelleNZ programme

¶1302

Exception reporting

¶1002

Exemplary or punitive damages insurance contracts

¶407

Expert advice, use of

¶111

tax issues — disputes resolution

¶610

— requests for tax records

¶609

External Reporting Board (XRB) generally accepted accounting principles (GAAP) — not-for-profit organisations

¶301 ¶1702

F Federated societies

¶1703

Feynman, Richard

¶1102

Fiduciaries

¶104

fiduciary duties — duty of care

¶111

— exercise of powers for proper purpose

¶107

— exercise of powers in relation to employees

¶106

— in relation to obligations

¶110

— reckless trading

¶109

— to act in good faith and best interests of company

¶105

— to comply with Companies Act and Constitution

¶108

— use of information and advice

¶112

Finance and audit committees

¶1007

risk management

¶1105

Finance strategy finance issues prompts list key financial policies key issues assessment chart

¶1308; ¶1310 ¶1310 ¶1309; ¶1310

Financial Markets Authority

¶702

Financial statements

¶301; ¶310

accounting policies

¶307

activity ratios

¶308; ¶309

alternative reporting requirements

¶803

— opt-in or opt-out period

¶811

analysing statements

¶308

audit requirements — see Auditing balance sheet charities

¶303 ¶1702

creditor days

¶308

cross-sectional (comparative) analysis

¶308

current assets and liabilities

¶303

current ratio

¶308

debt to equity ratio

¶308

debtor days

¶308

dividends

¶305

earnings before interest and tax (EBIT)

¶304

earnings before interest, tax, depreciation and amortisation (EBITDA)

¶304

equity

¶303

equity statement

¶305

filing financial statements

¶1206

— balance date

¶1206

— exclusions

¶1206

— group exclusions

¶1206

— inactive entities

¶1206

— “large” companies

¶1206

financial reporting — board meetings

¶1002

— exception reporting

¶1002

financing activities

¶306

fixed assets

¶303

generally accepted accounting principles (GAAP)

¶301

goodwill

¶303

gross margin (gross profit)

¶304

growth rate

¶308; ¶309

income statement (profit and loss account)

¶304

insurance proposals

¶406

intangible assets

¶303

interest cover ratio

¶308

internally generated goodwill

¶303

International Financial Reporting Standards (IFRS)

¶302

International Public Sector Accounting Standards (IPSAS)

¶303

inventory

¶303

inventory turnover

¶308

investing activities

¶306

liquidity ratios

¶308; ¶309

net profit after tax (NPAT)

¶304

net profit before tax

¶304

New Zealand equivalents to International Financial Reporting Standards (NZ-IFRS)

¶302

New Zealand equivalents to International Financial Reporting Standards with Reduced Disclosure Regime (NZ-IFRS-RDR)

¶302

notes to the accounts

¶307

operating activities

¶306

profitability ratios

¶308; ¶309

quick ratio

¶308

ratio analysis

¶308

replacement ratio

¶308

solvency ratios

¶308; ¶309

special purpose accounts

¶302

statement of cash flows

¶306

statement of financial performance

¶304

statement of financial position

¶303

statement of movements in equity

¶305

time-series analysis

¶308

term liabilities

¶303

understanding statements

¶302

working capital

¶303

Financing activities statement of cash flows

¶306

Fines and fees — see Infringement fines and fees Fire insurance

¶403

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Fixed assets balance sheet

¶303

FMC Reporting Entities financial audits Forecasts — see Prospective financial information

¶702

Fortune 500 “Most Admired Companies”

¶1601

Fraud audits — see Auditing Fringe benefit tax (FBT) Inland Revenue website and resources

¶611

Full or partial closure of business exercise of powers in relation to employees Functional strategies

¶106 ¶1303; ¶1308

finance strategy — finance issues prompts list — key financial policies — key issues assessment chart

¶1308; ¶1310 ¶1310 ¶1309; ¶1310

human resources strategy — human resources prompts list

¶1308; ¶1310

— key human resources policies

¶1310

— key issues assessment chart

¶1309; ¶1310

information technology strategy — information technology issues prompts list — key information technology policies — key issues assessment chart

¶1308; ¶1310 ¶1310 ¶1309; ¶1310

innovation strategy — innovation issues prompts list — key innovation policies

¶1308; ¶1310 ¶1310

— key issues assessment chart

¶1309; ¶1310

— key drivers combined

¶1308

— major change opportunity (MCO) form

¶1309

marketing strategy

¶1309

— key issues assessment chart

¶1309

— key marketing policies

¶1309

— key service policies

¶1309

— major change opportunity (MCO) form

¶1309

— marketing issues prompts list service/product strategy — key issues assessment chart — key service policies — service issues prompts list

¶1308; ¶1309 ¶1310 ¶1309; ¶1310 ¶1309 ¶1308; ¶1310

G Garden leave

¶909

employment agreement provisions

¶903

Generally accepted accounting principles (GAAP)

¶301

not-for-profit organisations

¶1702

Global Competitiveness Report

¶1601

Good faith duty — see Duty of good faith Goods and services tax (GST) filing dates

¶604

Inland Revenue website and resources

¶611

legal framework

¶602

liability for unpaid tax

¶607

not-for-profit organisations

¶601; ¶605

obligation to pay tax

¶606

responsibility for returns

¶605

Goodwill balance sheet

¶303

Governance committees

¶1007

Governance New Zealand

¶1003

Governance practices audits

¶702; ¶1501

— audit process

¶1503

— Board evaluation

¶1504

— Board evaluation process

¶1505

— director evaluation

¶1505

— Governance Audit and Plan to Remedy

¶1503

— New Zealand principles

¶1502

Board Charter

¶118

board’s construction

¶1008

charities

¶1701; ¶1714

charities regulator

¶1704

disclosure statement

¶119

governance, defined

¶1704

governance templates — Board Code of Conduct

¶1010

— Board Expenses Policy

¶1010

— Delegations of Authority

¶1010

— Director Induction

¶1010

— Directors’ Duties

¶1010

— Duties of the Chair

¶1010

— Human Resources Committee Terms of Reference

¶1010

— Protected Disclosures Policy and Procedures

¶1010

incorporated societies

¶1701; ¶1714

information technology — see Information technology governance not-for-profit organisations

¶1701; ¶1714

policies and procedures — see Internal controls public sector organisations

¶1801; ¶1808

Government funding disclosure of interests

¶113

Gross margin (gross profit) income statement (profit and loss account) Group companies

¶304

filing financial statements — group exclusions

¶1206

Growth rate analysing financial statements Guarantees

¶308; ¶309 ¶110

H Hacking

¶1403

Hazards — see Health and safety; Risk management Health and safety

¶501; ¶513

accident compensation regime

¶512

Accredited Employers Programme

¶512

audits

¶702

— engaging an auditor

¶704

designing a compliant governance framework

¶507

— checklist

¶507

employee participation programmes

¶508

employees’ and others’ obligations

¶505

employers’ obligations

¶904

enforcement and claims

¶511

grossly disproportionate, defined

¶502

hazard, defined

¶502

hazard identification and management

¶502

— determining costs involved

¶502

health and safety notices — improvement notices

¶511

— non-disturbance notices

¶511

— prohibition notices

¶511

committees — see Health and safety committees representatives — see Health and safety representatives insurance for fines or infringement fees

¶403; ¶501; ¶506

legal framework

¶501; ¶1702

not-for-profit organisations

¶1702

notifiable events

¶510

officers’ due diligence obligations

¶504

— exclusions

¶504

— non-compliance

¶506

person conducting a business or undertaking (PCBU) — consultation with other PCBUs

¶503

— consultation with employees

¶508

— election of health and safety representatives

¶509

— establishment of health and safety committee

¶509

— non-compliance

¶506

— obligations to manage risk

¶502

remedial orders

¶506

risk, defined

¶502

safety management programmes

¶512

stress management

¶904

Health and Safety at Work Act 2015

¶501

contracting out of Act

¶501

enforcement and claims

¶511

non-compliance with Act

¶506

Health and safety committees Health and safety representatives Hobsonville Land Co Ltd

¶509; ¶1007 ¶509 ¶1802

Holiday and leave entitlements employers’ obligations Housing New Zealand Corp

¶904 ¶1802

Human resources audits

¶702

engaging an auditor

¶704

Plan to Remedy

¶708

Human Resources Committee

¶1007

terms of reference

¶1010

Human resources strategy human resources prompts list

¶1308; ¶1310

key human resources policies

¶1310

key issues assessment chart

¶1309; ¶1310

I Improper motive

¶107

Improvement notices

¶511

enforceable undertaking

¶511

Inactive entities defined

¶1206

filing financial statements

¶1206

Incapacity for work dismissal

¶909

negotiated exits

¶909

Income statement (profit and loss account)

¶304

accounting policies

¶307

notes to the account

¶307

Income tax — see Taxation Incorporated charitable trust board

¶1703

Incorporated societies

¶1701; ¶1714

— see also Charitable trusts; Not-for-profit organisations annual meetings — see Annual meetings board meetings — see Board meetings branch societies

¶1703

breaches of duties

¶1711

characteristics of NFP entities

¶1703

compared to incorporated charitable trust board

¶1703

confederations

¶1703

constitution

¶1703; ¶1707

— checklist

¶1707

dispute resolution procedures

¶1712

division of powers

¶1703

duty of care

¶1708

duty of loyalty

¶1706

duty of obedience

¶1707

federated societies

¶1703

governance

¶1703

— duties of governance

¶1705

— governance and management compared

¶1704

governance audit

¶1503

Interests Register

¶205

key features

¶1703

legal framework

¶1703

— bylaws

¶1703

— Incorporated Societies Bill, Exposure Draft

¶1701; ¶1702

— recognition of culture or tikanga

¶1703

Māori organisations

¶1703

meetings

¶1703

members’ contractual relationship

¶1703

national structures

¶1703

officer, defined

¶1710

officers’ indemnity insurance

¶403; ¶404

— use of a broker

¶411

officers’ duties

¶101

— application of Companies Act 1993

¶102

— conflicts of interest

¶113

— duties owed to society — personal liability

¶1709 ¶101; ¶1713

— reliance on information and advice

¶1710

operational challenges

¶1702

ownership interests

¶1703

private bodies

¶1703

reckless trading

¶1708

regulatory issues

¶1702

taxation obligations — officers’ personal liability

¶603; ¶605

types of NFP entities

¶1703

unincorporated status

¶1703

voting rights

¶1703

winding up — distributions to members

¶1703

Indemnity insurance

¶404

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Independent Crown entities

¶1802

Information technology governance

¶1401

applications software, defined

¶1403

cyber security, defined

¶1403

digital change, the problem

¶1402

digital leadership and transformation

¶1406

— creating a digital vision

¶1406; ¶1407

— determining IT maturity

¶1406; ¶1407

— direct and govern technology-enabled strategy, defined

¶1407

— factory (defensive) mode considerations

¶1406; ¶1407

— strategic grid framework

¶1406; ¶1407

— strategic (offensive) mode considerations

¶1406; ¶1407

— support (defensive) mode considerations

¶1406;

¶1407 — turnaround (offensive) mode considerations

¶1406; ¶1407

Governance of Enterprise Information and Technology (GEIT)

¶1402

hacking

¶1403

hardware, defined

¶1403

information governance, defined

¶1403

information security, defined

¶1403

risk management — Board competency

¶1404; ¶1405

— business continuity

¶1405

— governance without exception

¶1405

— information security

¶1404

— IT infrastructure

¶1404

— IT project risk

¶1405

— reputation

¶1405

— SMACT technologies

¶1404

software, defined

¶1403

systems software, defined

¶1403

technology governance, defined

¶1403

Information technology strategy information technology issues prompts list key information technology policies

¶1308; ¶1310 ¶1310

key issues assessment chart

¶1309; ¶1310

Infringement fines and fees health and safety infringements — insurance cover for fines and fees

¶403; ¶501; ¶506

Innovation strategy innovation issues prompts list key innovation policies key issues assessment chart

¶1308; ¶1310 ¶1310 ¶1309; ¶1310

Inspection of premises WorkSafe inspectors

¶511

Inspection of records tax records Institutes of technology

¶609 ¶1802

Insurance and Savings Ombudsman

¶410

Insurance brokers

¶411

Insurance contracts

¶401; ¶402

agreed value insurance

¶404

business interruption insurance

¶403

changes in circumstances

¶407

checklist

¶412

coverage clause

¶407

data loss or failure of computer-related equipment

¶407

defending legal proceedings insurance directors’ and officers’ indemnity insurance

¶403; ¶407; ¶501 ¶403; ¶407

disputes resolution

¶410

employment-related insurance

¶403

exclusions

¶403; ¶407

exemplary or punitive damages

¶407

extensions

¶407

health and safety fines or infringement fees

¶403; ¶501; ¶506

indemnity insurance

¶404

insured’s obligations

¶407

insurer’s rights of subrogation

¶407

key person insurance

¶403

key policy elements

¶407

making a claim

¶408

material information

¶406; ¶407

mortgage insurance

¶403; ¶404

motor vehicle insurance

¶403; ¶404

occurrence of an event, notification

¶408

product liability insurance

¶403

professional indemnity insurance

¶403; ¶407

property insurance

¶403; ¶404

public liability insurance

¶403

purchasing insurance — disclosure obligation

¶402; ¶406

— expert advice

¶404

— financial statements

¶406

— legal obligations

¶405

— level of cover

¶404

— level of loss

¶404

— promotional literature

¶406

— proposal document

¶406

— relevant and material information

¶406; ¶407

— risk management procedures

¶406

— up-to-date valuations

¶406

renewing the policy

¶409

replacement insurance

¶404

special events insurance

¶403

specialist assets insurance

¶403

third-party vehicle insurance

¶404

types of insurance

¶403

Intangible assets balance sheet

¶303

Intellectual property balance sheet

¶303

Intellectual Property Office of New Zealand (IPONZ) registered trade mark search Interest cover ratio

¶1203

analysing financial statements

¶308

Interests Register

¶113; ¶205

Internal controls

¶706

auditing

¶706

— audit findings

¶707

— Plan to Remedy

¶708

monitoring

¶706

risk management — see Risk management whistle-blowing

¶706; ¶904; ¶1010

Internally generated goodwill

¶303

International Financial Reporting Standards (IFRS)

¶302

International Public Sector Accounting Standards (IPSAS) ¶303 Interviews short-listed CEO candidates

¶902

Inventory balance sheet

¶303

Inventory turnover analysing financial statements

¶308

Investigations meeting minutes tax records

¶1003 ¶609

— non-party discovery

¶609

Investing activities statement of cash flows

¶306

J Joint venture company “best interests” rule

¶105

Joint shareholders voting rights

¶812

K Key person insurance

¶403

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

L “Large” companies filing financial statements

¶1206

large, defined

¶1206

Learning Media Ltd

¶1807

Leave entitlements employers’ obligations

¶904

Legal advice advisor’s meeting attendance

¶812

ending the relationship

¶909

tax issues — disputes resolution

¶610

— requests for tax records

¶609

Legal costs insurance contracts — occurrence of an event and making a claim

¶403; ¶407 ¶408

Legal hazards risk management

¶1102

Legal framework Accident Compensation Act 2001

¶501; ¶512

Anti-Money Laundering and Countering Financing of Terrorism Act 2009

¶1702

Biosecurity Act 1993

¶1805

Charitable Trusts Act 1957

¶1703

Companies Act 1993 Crown Entities Act 2004

¶102; ¶205; ¶301; ¶702; ¶802 ¶1801

Crown Minerals Act 1991

¶501

Education Act 1989

¶1802

Electricity Act 1992

¶501

Financial Markets Conduct Act 2013 Financial Reporting Act 2013

¶301; ¶702 ¶301; ¶702; ¶1702

Financial Reporting (Amendments to Other Enactments Act 2013

¶301

Gas Act 1992

¶501

Goods and Services Tax Act 1985

¶602

Hazardous Substances and New Organisms Act 1996

¶501

Health and Safety at Work Act 2015 Income Tax Act 2007 Incorporated Societies Act 1908 Incorporated Societies Bill, Exposure Draft

¶403; ¶501; ¶1702; ¶1802 ¶602 ¶1703 ¶1701; ¶1702

Industry Training and Apprenticeships Act 1992

¶1802

Limited Partnerships Act 2008

¶1703

Local Government Act 2002

¶1805

New Zealand Public Health and Disability Act 2000

¶1802

Public Finance Act 1989

¶1804

Resource Management Act 1991

¶1805

State-owned Enterprises act 1986

¶1803

Tax Administration Act 1994 Te Ture Whenua Māori Act 1993

¶602 ¶1702

Trusts Act 1956

¶1702

WorkSafe New Zealand Act 2013

¶1802

Letter of engagement auditors

¶704

Letters to an unknown judge — see Minutes Levies accident compensation levies Limited partnerships

¶512 ¶1703

Liquidity hazards risk management

¶1102

Liquidity ratios analysing financial statements Loans Local government

¶308; ¶309 ¶110 ¶1805

Loss of profits insurance

¶403

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

M Management letter audit findings

¶707

Marine vessels specialist assets insurance

¶403

Market hazards risk management Marketing strategy

¶1102 ¶1303; ¶1309

key issues assessment chart

¶1309

key marketing policies

¶1309

key service policies

¶1309

major change opportunity (MCO) form

¶1309

marketing issues prompts list

¶1308; ¶1309

Materiality audit procedure — determining qualitative materiality insurance contracts material information, defined

¶703 ¶406; ¶407 ¶407

Media releases public boards

¶1808

— in committee motion

¶1808

Mediation Service

¶908

records of settlement

¶908

Meetings annual — see Annual meetings Audit Committee

¶709

board — see Board meetings Board Annual Work Plan

¶120

charitable trusts

¶801

conflicts of interest — identifying and disclosing conflicts

¶205; ¶206

— appropriate non-participating action

¶207; ¶208

— conflict disclosed after decision made

¶208

conventional and consensus-based meeting rules compared

¶1005

incorporated societies

¶801; ¶1703

minutes — see Minutes shareholders — see Shareholders’ meeting Mind Your Own Business (MYOB) software

¶1403

Ministry for Māori Development (Te Puni Kokiri) public governance roles

¶1808

Ministry for Pacific Island Affairs public governance roles Ministry for Women

¶1808

public governance roles

¶1808

Minutes annual meetings

¶812

board meetings

¶1003

— matters arising

¶1002

— minutes of previous meeting

¶1002

letters to an unknown judge

¶1003

Misconduct dismissal

¶909

negotiated exits

¶909

Misleading and deceptive behaviour

¶905

Misrepresentation

¶903

Mission statements

¶1303; ¶1305

external analysis sheet

¶1305

guidelines

¶1305

internal analysis sheet

¶1305

SWOT analysis

¶1305

Misuse of directors’ powers

¶107

Monopolies sustainable competitive advantage (SCA)

¶1303; ¶1306

Mortgage insurance

¶403

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Motor vehicle insurance

¶403

coverage, exclusions

¶407

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

third-party insurance

¶404

N Negligence insurance contracts — key policy elements — legal costs

¶403; ¶407 ¶407 ¶403; ¶407

— legal obligations

¶405

— occurrence of an event and making a claim

¶408

— proposal document

¶406

— purchasing insurance

¶404

— renewing the policy

¶409

Negotiated exits

¶909

Net profit after tax (NPAT) income statement (profit and loss account)

¶304

Net profit before tax income statement (profit and loss account)

¶304

New Zealand equivalents to International Financial Reporting Standards (NZ-IFRS)

¶302

New Zealand equivalents to International Financial Reporting Standards with Reduced Disclosure Regime (NZ-IFRS-RDR)

¶302

New Zealand Film Commission

¶1802

New Zealand Post

¶1803

New Zealand Qualifications Authority

¶1802

New Zealand Venture Investment Fund

¶1802

Non-disturbance notices

¶511

Non-pecuniary arrangements conflicts of interest

¶202

Non-solicitation employment agreement provisions Not-for-profit organisations

¶903 ¶1701;

¶1714 — see also Charitable trusts; Incorporated societies breaches of duties

¶1711

characteristics of NFP entities

¶1703

constitution checklist

¶1707

deregistration issues

¶1702

dispute resolution procedures

¶1712

duty in relation to obligations

¶1708

duty of care

¶1708

duty of loyalty

¶1706

duty of obedience

¶1707

financial reporting

¶1702

— External Reporting Board standards

¶1702

— Public Benefit Entity Simple Format Reporting — Accrual (Not-For-Profit)

¶1702

— service performance report

¶1702

governance

¶1701; ¶1702

— charities regulator

¶1704

— composition of the board

¶1704

— conflicts of interest

¶1702; ¶1706

— defined

¶1704

— duties of governance

¶1705

— governance and management compared

¶1704

— governing bodies

¶1704

— incorporated societies

¶1703

— policies and procedures

¶1704

— understanding obligations of office

¶1704

health and safety

¶1702

legal framework

¶1701; ¶1702

— bylaws

¶1703

legislative reforms

¶1702

— Incorporated Societies Bill, Exposure Draft

¶1701; ¶1702

Maori organisations

¶1703

member participation decreasing

¶1702

officer, defined

¶1710

operational challenges

¶1702

personal liability

¶1713

reckless trading

¶1708

regulatory issues

¶1702

types of NFP entities

¶1703

unauthorised profits

¶1706

unincorporated status

¶1703

Notes to the accounts

¶307

Notices annual meetings

¶809

— availability of annual report

¶811

— irregularity in notice

¶811

— notice period

¶811

— service of notice

¶810

board meetings

¶1002

— agenda items

¶1002

— late items

¶1002

end of relationship, CEOs

¶909

health and safety notices — improvement notices

¶511

— non-disturbance notices

¶511

— prohibition notices

¶511

Notifiable events

¶510

O Offences and penalties

¶116

non-compliance with health and safety obligations

¶506

— insurance cover for fines or infringement fees

¶403; ¶501; ¶506

non-compliance with tax obligations — filing returns

¶604

Omissions or acts of negligence insurance contracts — key policy elements — legal costs — occurrence of an event and making a claim

¶403; ¶407 ¶407 ¶403; ¶407 ¶408

— proposal document

¶406

— purchasing insurance

¶404

— renewing the policy

¶409

One-off events insurance

¶403

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Onerous duties — see Fiduciaries Operating activities statement of cash flows

¶306

Operational hazards risk management

¶1102

Opinions audit opinions

¶707

O’Reilly, Phil

¶1307

Organisational risk/hazards — see Risk management Overseas companies Companies Office information

— information available

¶1202

— online information

¶1202

— searches

¶1202

— updating information

¶1204

Companies Register

¶1201

filing annual returns

¶1205

filing financial statements

¶1206

— balance dates

¶1206

— exclusions

¶1206

— group exclusions

¶1206

— inactive entities

¶1206

— “large” companies

¶1206

— inactive entity, defined

¶1206

large, defined

¶1206

maintaining company records

¶1207

registration

¶1203

— Australian overseas companies

¶1203

— reservation of company name

¶1203

P Partial closure — see Full or partial closure of business Partnerships financial audits limited partnerships

¶702 ¶1703

Passive directors

¶103

reckless trading

¶109

Pay as you earn (PAYE)

¶601

Inland Revenue website and resources

¶611

liability for unpaid tax

¶607

not-for-profit organisations

¶601; ¶605

obligation to pay tax

¶606

responsibility for returns

¶605

Pecuniary interests

¶202

— see also Conflicts of interest Penalties — see Offences and penalties Performance management chief executive officers (CEOs) — CEO review committee

¶907

— dismissal for poor work performance

¶909

— key performance indicators

¶907

— negotiated exits

¶909

— performance improvement plans

¶907

— performance reviews

¶903; ¶907

Person conducting a business or undertaking (PCBU) defined

¶502

health and safety obligations — consultation with other PCBUs

¶503

— design a compliant governance framework

¶507

— due diligence, exclusions

¶504

— elect health and safety representatives

¶509

— employee participation programmes

¶508

— employees’ and others’ obligations

¶505

— establish health and safety committee

¶509

— non-compliance

¶506

— obligations to manage risk

¶502

— officers’ due diligence obligations

¶504

Personal grievances unjustified dismissal

¶909

Personal information privacy and management

¶904; ¶906

Personal injuries suffered at work — see Accident compensation regime Personal liability

¶103

deemed directors

¶103

legislation imposing liability not-for-profit organisations passive directors

¶103; ¶116 ¶1713 ¶103; ¶109

Physical hazards employers’ obligations Plan to Remedy

¶904

audit findings

¶708; ¶1503

Plant and equipment insurance

¶403

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Policies and procedures — see Internal controls Polytechnics

¶1802

Poor work performance dismissal

¶909

negotiated exits

¶909

Porter, Michael

¶1301; ¶1302

Privacy obligations

¶904; ¶906

Product liability insurance

¶403

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Product recall insurance

¶403; ¶404

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Professional indemnity insurance

¶403; ¶407

legal costs

¶403; ¶407

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Profit and loss account

¶304

accounting policies

¶307

notes to the account

¶307

Profitability ratios analysing financial statements

¶308; ¶309

Prohibition notices

¶511

Proper purpose

¶107

Property insurance

¶403

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Prospective financial information auditing

¶702

Protected disclosures employers’ obligations policy and procedure template

¶904 ¶1010

Provisional tax

¶606

underpayment of tax

¶606

Proxy voting

¶812

Psychological hazards employers’ obligations

¶904

Public liability insurance

¶403

coverage clause

¶407

— exclusions

¶407

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Public governance board governance manuals

¶1808

companies established under Public Finance Act

¶1804

conflicts of interest

¶1808

Crown entities

¶1802

— Crown entity companies

¶1802

— Crown entity subsidiaries

¶1802

— school boards of trustees

¶1802

— statutory entities

¶1802

— tertiary education institutions

¶1802

governance

¶1801; ¶1808

induction of board members

¶1808

legal framework

¶1801

local government

¶1805

— Council Controlled organisations (CCO)

¶1805

— Council Controlled Trading Organisation (CCTO)

¶1805

measuring success or failure

¶1807

media releases

¶1808

— in committee motion

¶1808

public governance roles

¶1808

removal of board members

¶1806

— just cause, defined

¶1806

State-owned enterprises

¶1803

Public Trust

¶1802

Q Qualified opinion audit findings Quasi-commercial organisations

¶707 ¶1802

Quick ratio analysing financial statements Quinn, S

¶308 ¶1704

Quorum annual meetings

¶812

board meetings

¶1002

R Radio New Zealand

¶1802

Ratio analysis analysing financial statements Rational problem-solving (RPS) procedures Reckless trading

¶308 ¶1004 ¶109

duty related to obligations

¶110; ¶1708

not-for-profit organisations

¶1708

Record-keeping

company records

¶1003

tax records

¶609

— non-party discovery

¶609

— records, defined

¶609

— retention periods

¶609

— search and seizure

¶609

Records of settlement

¶908

negotiated exits

¶909

Recovery of losses — see Subrogation Recruitment chief executive officers (CEOs)

¶901

— appointment

¶902

— employment agreements

¶903

— identifying employers’ requirements

¶902

— interviewing short-listed candidates

¶902

— position description

¶902

— remuneration

¶902

— selection criteria

¶902

— status as an employee

¶902

Redundancy

¶909

Regional councils Registers

¶1805

Companies Register

¶1201

other entities registers

¶1201

Register of Interests — see Interests Register Resolutions Register

¶1002; ¶1009

risk management — Issues Register — Risk Register

¶1105 ¶1104; ¶1105

Remedies health and safety infringements

¶506; ¶511

Remuneration chief executive officer (CEO)

¶902

Reparation health and safety infringements

¶506

Replacement insurance

¶404

Replacement ratio analysing financial statements

¶308

Reputation conflicts of interest — see Conflicts of interest information technology risk

¶1405

— governance without exception

¶1405

Resignation chief executive officers (CEOs)

¶909

Resolutions annual meetings — in lieu of meeting

¶804

— ordinary resolutions

¶812

— special resolutions

¶812

board meetings — Resolutions Register

¶1002; ¶1009

Restraint of trade employment agreement provisions

¶903

Restructuring — see Business restructuring Retirement Commissioner Risk management

¶1802 ¶401; ¶1101

balancing risk and reward

¶1102

best practice standards

¶1104

communication and consultation

¶1104

credit hazards

¶1102

defined

¶1102

evaluating hazards and associated risk

¶1104

hazard, defined hazard identification

¶502 ¶1104

health and safety — see Health and safety information technology risk — Board competency

¶1404 ¶1404; ¶1405

— business continuity — digital leadership and transformation

¶1405 ¶1406; ¶1407

— governance without exception

¶1405

— information security

¶1404

— IT infrastructure

¶1404

— IT project risk

¶1405

— reputation

¶1405

— SMACT technologies

¶1404

insurance — see Insurance contracts legal hazards

¶1102

liquidity hazards

¶1102

market hazards

¶1102

monitoring and review

¶1105

— Issues Register

¶1105

— Risk Register

¶1104; ¶1105

operational hazards

¶1102

organisational hazards

¶1102

risk analysis

¶1104

risk, defined

¶502; ¶1102

Risk Management Policy Matrix

¶1104

risk management process

¶1104

risk management strategy

¶1103

sector hazards

¶1102

SMART objectives

¶1104

Robert’s Rules

¶1005

S Schedular payments

¶601

charities

¶601

School boards of trustees

¶1802

Searches company name

¶1203

registered trade marks

¶1203

tax records — search and seizure

¶609

Sector hazards risk management

¶1102

Self-employed persons health and safety obligations

¶502

— non-compliance

¶506

Service of documents and notices notice of annual meeting

¶810

notice of board meeting

¶1002

Service/product strategy

¶1310

key issues assessment chart key service policies

¶1309; ¶1310 ¶1309

service issues prompts list

¶1308; ¶1310

Settlement agreements

¶909

negotiated exits

¶909

Share issue balance sheet

¶303

improper motive for issue

¶107

Share register

¶1207

failure to keep

¶108

records to be kept at registered office

¶1207

— exception

¶1207

Shareholders annual meetings, rights

¶807

— voting rights

¶812

derivative actions

¶104

Shareholders’ meeting changes to Constitution

¶117

Single project liability insurance

¶403

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Small business defined

¶410

insurance disputes, resolution

¶410

meetings — see Meetings standing committees use of insurance broker

¶1007 ¶411

SMART objectives risk management

¶1104

strategic planning

¶1306

Solid Energy New Zealand Ltd

¶1807

Solvency ratios analysing financial statements Southern Response Earthquake Services Ltd

¶308; ¶309 ¶1804

Special events insurance

¶403

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Special purpose accounts

¶302

Specialist assets insurance

¶403

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Sport New Zealand

¶1704

Stakeholder management

¶1601

categories of stakeholders

¶1603

community engagement and CSR programmes

¶1604

stakeholder, defined

¶1602

stakeholder management strategy

¶1603

— analysing stakeholders

¶1603

— management plan

¶1603

— encourage feedback

¶1603

— monitoring and reporting

¶1603

— principles of best practice

¶1603

— stakeholder impact matrix

¶1603

stakeholders and their interests

¶1602

Standing committees

¶1007

Standing orders (meeting rules)

¶1005

board decision-making

¶1005

conventional and consensus-based meeting rules compared

¶1005

State-owned enterprises

¶1803

State Services Commission board guidelines

¶1808

Statement of cash flows

¶306

accounting policies

¶307

notes to the account

¶307

Statement of financial performance

¶304

accounting policies

¶307

notes to the account

¶307

Statement of financial position

¶303

accounting policies

¶307

notes to the account

¶307

Statement of movements in equity

¶305

accounting policies

¶307

notes to the account

¶307

Storm damage insurance

¶403

occurrence of an event and making a claim

¶408

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy Strategic business planning business values statement

¶409 ¶1301 ¶1303; ¶1307

— establishing values

¶1307

— measurable business values

¶1307

— “ship wreck” method of establishing values

¶1307

— SMART objectives

¶1306

— values enabling company success

¶1307

ExcelleNZ programme

¶1302

finance strategy — finance issues prompts list — key financial policies — key issues assessment chart functional strategies — key drivers combined — key issues assessment chart — major change opportunity (MCO) form

¶1308; ¶1310 ¶1310 ¶1309; ¶1310 ¶1303; ¶1308; ¶1310 ¶1308 ¶1309; ¶1310 ¶1309

human resources strategy — human resources prompts list

¶1308; ¶1310

— key human resources policies

¶1310

— key issues assessment chart

¶1309; ¶1310

implementing the strategy

¶1312

information technology strategy

¶1406

— creating a digital vision

¶1406; ¶1407

— information technology issues prompts list — key information technology policies — key issues assessment chart

¶1308; ¶1310 ¶1310 ¶1309; ¶1310

innovation strategy — innovation issues prompts list — key innovation policies — key issues assessment chart

¶1308; ¶1310 ¶1310 ¶1309; ¶1310

key business drivers

¶1303

marketing strategy

¶1309

— key issues assessment chart

¶1309

— key marketing policies

¶1309

— key service policies

¶1309

— major change opportunity (MCO) form

¶1309

— marketing issues prompts list

¶1308; ¶1309

measurement, monitoring and review

¶1303; ¶1311

— Board Strategy Monitoring Guide mission statements

¶1312 ¶1303; ¶1305

— business mission development sheet

¶1305

— external analysis sheet

¶1305

— internal analysis sheet

¶1305

— SWOT analysis

¶1305

service/product strategy

¶1310

— key issues assessment chart — key service policies — service issues prompts list

¶1309; ¶1310 ¶1309 ¶1308; ¶1310

stakeholder management strategy

¶1603

strategy, defined

¶1302

sustainable competitive advantage (SCA)

¶1303; ¶1306

— critical success factors rating chart

¶1306

— critical success factors (CSF) sheet

¶1306

— SMART objectives

¶1306

vision statements

¶1303; ¶1304

Stress employers’ obligations

¶904

Subrogation insurer’s rights

¶407

Subsidiaries “best interests” rule Crown entity subsidiaries exercise of powers in relation to employees Sustainable competitive advantage (SCA)

¶105 ¶1802 ¶106 ¶1303; ¶1306

critical success factors rating chart

¶1306

critical success factors (CSF) sheet

¶1306

SMART objectives

¶1306

T Taxation

¶601

challenges

¶610

charities

¶601

checklist

¶612

dispute resolution

¶610

— time frames

¶610

filing dates

¶604

goods and services tax

¶601

incorporated societies

¶603

Inland Revenue website and resources

¶611

legal framework

¶602

mistakes and errors

¶608

not-for-profit organisations

¶601; ¶603; ¶605

notice of proposed adjustment (IR770)

¶610

PAYE

¶601

penalties, concessions

¶608

personal liability of key personnel

¶603; ¶607

provisional tax

¶606

record-keeping requirements

¶609

— non-party discovery

¶609

— retention periods

¶609

— search and seizure

¶609

registration for tax

¶1203

responsibility for returns

¶605

schedular payments

¶601

search and seizure

¶609

taxpayers’ obligations — to file returns

¶603 ¶604; ¶605

— to pay tax

¶606

trusts

¶603

unpaid tax

¶607

voluntary compliance

¶604

voluntary disclosure of errors

¶608

Term liabilities balance sheet

¶303

Terms of Reference document — see Board Charter Tertiary education institutions

¶1802

Third-party vehicle insurance

¶404

purchasing insurance

¶404

— key policy elements

¶407

— legal obligations

¶405

— proposal document

¶406

renewing the policy

¶409

Time-series analysis analysing financial statements

¶308

Trade secrets

¶114

Tradespeople health and safety obligations

¶502

— consultation with other PCBUs insurance contracts

¶503 ¶403; ¶404

— insurer’s rights of subrogation

¶407

— key policy elements

¶407

— legal obligations

¶405

— occurrence of an event and making a claim

¶408

— proposal document

¶406

— purchasing insurance

¶404

— renewing the policy

¶409

Training orders health and safety infringements

¶506

Transactions involving self-interest — see Conflicts of interest Treasury database public governance roles

¶1808

Trusts annual meetings — see Annual meetings board meetings — see Board meetings charitable — see Charitable trusts insurance — trustees’ indemnity insurance

¶403; ¶404

— use of a broker

¶411

Interests Register

¶205

legal framework

¶1702

— proposed reforms

¶1702

taxation — trustees’ personal liability

¶603

trustees’ duties

¶101

— application of Companies Act 1993

¶102

— conflicts of interest

¶113

— personal liability

¶101

U Universities

¶1802

Unpaid taxes

¶607

Unqualified opinion audit findings

¶707

Use of company information

¶114

Use of expert information and advice

¶112

V van Dadelszen, Mark Vision statements guidelines Visitors to the workplace

¶1704 ¶1303; ¶1304 ¶1304

health and safety obligations

¶505

Voting rights annual meetings

¶812

board meetings

¶1005

— conventional and consensus-based meeting rules compared

¶1005

— silence

¶1005

incorporated societies

¶1703

W Wānanga

¶1802

Wellington Water Ltd

¶1805

Westminster parliamentary procedure, Robert’s Rules

¶1005

Whistle-blowing

¶706

employers’ obligations

¶904

policy and procedure template

¶1010

Wholly-owned subsidiary company “best interests” rule

¶105

Withholding payments — see Schedular payments Workers — see Employees Working capital

¶303

WorkSafe inspectors WorkSafe New Zealand

¶511 ¶501; ¶1802

enforcement under Health and Safety at Work Act

¶511

legal framework

¶1802

notifiable events

¶510

World Economic Forum Global Competitiveness Report

¶1601

Wrongful dismissal claims insurance contracts

¶403

— key policy elements

¶407

— legal costs

¶403

— legal obligations

¶405

— occurrence of an event and making a claim

¶408

— proposal document

¶406

— purchasing insurance

¶404

— renewing the policy

¶409

X Xero software

¶1403