Regulators will show more muscle this year, directors warned

Company leaders can expect regulators to flex their muscles more this year as they take advantage of extended remits, better resources and strengthened enforcement powers, says the Institute of Directors.

Directors in 2022 should plan for proactive self-reporting, early engagement with regulators and have a plan for responding to regulator inquiries, said institute chief executive Kirsten Patterson.

The advice comes in an IoD report on the top five issues facing company directors this year.

Increased regulator activity features on the list along with climate change, reconnecting globally, talent shortage and “board character”, involving ethical leadership and setting the tone for an organisation.

Patterson said there is no time for directors to take a “business as usual” approach this year.

“Boards will have to continue tackling those knock-on effects of the pandemic, such as the talent shortage and supply chain disruption, but also keep those issues such as climate change firmly in their sights.”

The report, developed by IoD’s governance leadership centre and informed by results of the institute’s 2021 director sentiment survey, says last year regulatory actions against companies and directors were on the rise.

They were expected to escalate this year, driven by a focus on governance culture and conduct, privacy, health and safety, and anti-money laundering.

The Financial Markets Authority (FMA) would this year continue to concentrate on twopriorities: governance and culture and deterrence of misconduct. Non-compliance with New Zealand’s anti-money laundering and countering the financing of terrorism would remain an FMA focus.

The FMA’s remit and resourcing was set to expand over the next three to four years with the introduction of three new legislative regimes: the conduct of financial institutions, changes to insurance contract law and climate-related disclosures.

Regulators such as the Commerce Commission and the Reserve Bank were expected to increase their monitoring and enforcement activities this year.

Last year was a busy one for mergers and acquisitions and the activity was tipped to continue. The IoD expected regulators to keep an eye on this area.

“Boards will also need to prioritise the health, safety and wellbeing of their workers. 2021 saw an increase in focus on officer due diligence duties under the Health and Safety At Work Act 2015.”

The new Privacy Act of 2020 had introduced key changes. The Privacy Commissioner in October had noted a 272 per cent increase in the number of notifiable privacy breaches since.

More shareholder activism was also expected this year. Class actions, supported by litigation funders, had been increasing. The Law Commission was reviewing this area, with a preliminary view that a general class actions regime should be introduced in New Zealand and that litigation funding should be regulated.

The IoD recommended directors review systems, policies and process to ensure conduct and organisational culture meet regulatory expectations.

“Ensure there is a process in place for managing any issues that require escalation to the board and any regulator. Measure and report. Conduct regular audits and keep comprehensive records.”

Also urged was proactive self-reporting, early engagement with regulators, having a plan for responding to any regulator’s inquiry and having professional advisers to assist when necessary.

The report noted a legislative change on the horizon that could have “a profound impact” on boards of companies.

The Companies (Directors’ Duties) Amendment Bill sought to clarify current practice and provide guidance on directors’ duties.

Core areas of governance responsibility such as cybersecurity and health and safety were regulars on the IoD’s annual top five issues lists, and were no less important this year.

“It goes without saying these should, by now, be part of the business as usual for directors and on the board agenda….board also need to be thinking longer-term and imagining the future.

“This year, take time to envision 2040 – it’s only 18 years away. We have selected this date because it will mark a significant milestone…the bicentenary of Te Tiriti o Waitangi.”

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