Corporate governance

Fletcher Building is a New Zealand-based building materials manufacturer whose securities are listed on the New Zealand and Australian stock exchanges.

These exchanges require formal adoption of approved corporate governance practices by listed company boards of directors. Accordingly, the board of Fletcher Building confirms that it is committed to the highest standards of behaviour and accountability, and has adopted policies and procedures that reflect this commitment.

The company has adopted the principles recognised by the ASX Corporate Governance Council as an appropriate way to organise its corporate governance policies and reporting. In establishing its corporate governance procedures, the company reviews the practices and trends in corporate governance in other jurisdictions, and has incorporated these where appropriate.

The company believes that the practices it has adopted ensure that it meets the requirements of NZX’s Corporate Governance Best Practice Code and the Securities Commission’s Corporate Governance in New Zealand Principles.

Fletcher Building’s corporate governance practices, including matters reserved for the board and those delegated to senior executives, are fully detailed on its website and shareholders seeking an in-depth review are encouraged to access information from this source.

Back to top1. Ensuring solid foundations for management and oversight

The company’s procedures are designed to:

• Enable the board to provide strategic guidance for the company and effective oversight of management.
• Clarify the respective roles and responsibilities of board members and senior executives in order to facilitate board and management accountability to both the company and its shareholders.
• Ensure a balance of authority so that no single individual has unfettered powers.

The board has an obligation to protect and enhance the value of the company’s assets, and to act in its interests. It exercises this obligation through the approval of appropriate corporate strategies and processes, with particular regard to portfolio composition and return expectations. These include approval of transactions relating to acquisitions, divestments and capital expenditures above delegated authority limits, financial and dividend policy and the review of performance against strategic objectives.

As part of its review of the strategic direction of the company, a strategy session is held with senior management each year. Senior management are expected to address strategic issues in the business as part of their monthly review. Where appropriate, special strategic reviews are held of business groups or units, where material change is evident or contemplated.

The company achieves board and management accountability through written terms of reference for the chairman, directors and management, and a formal delegation of authority to the chief executive. The effect of this framework is that whilst the board has statutory responsibility for the activities of the company, this is exercised through delegation to the chief executive, who is charged with the day-to-day leadership and management of the company. As part of its annual review of its governance processes, the board reviews the delegations to the chief executive each year.

The terms of reference for directors and the chairman, the charters for board committees and the delegation to the chief executive officer all provide for reviews of the performance of directors and senior management. The nominations committee assesses the composition and effectiveness of the board and its committees annually. The chair of the nominations committee undertakes one-on-one reviews annually with all directors on the effectiveness of the board. During the most recent financial year, the performance of directors was reviewed in accordance with the agreed process.

The board evaluates annually the performance of the chief executive and the chief executive’s direct reports. The evaluation is based on criteria that include the performance of the business and the accomplishment of long-term strategic objectives, and other non-quantitative objectives established at the beginning of each year. During the most recent financial year, performance evaluations of senior executives were conducted in accordance with this process.

In addition to these annual performance reviews, significant policy issues and capital expenditure or divestment decisions of management are required to undergo a formal peer group review process, including approval by the company’s executive committee or the board where necessary.

The governance procedures require the board to be comprised of a majority of independent directors and for there to be a separation of the role of chairman from that of the chief executive. These policies also provide that a director who has been employed in an executive capacity in the last three years cannot be considered an independent director. R G Waters will therefore be considered an independent director from 1 September 2009. With J P Ling being an executive director, eight of the nine directors are independent directors.

Back to top2. Structuring the board to add value

The directors believe that for the board to be effective it needs to facilitate the efficient discharge of the duties imposed by law on the directors and add value to the company. To achieve this, the board is organised in such a way that it:

• Obtains a proper understanding of, and competence to deal with, the current and emerging issues of the business.
• Can effectively review and challenge the performance of management and exercise independent judgement.
• Can assist in the identification of director candidates for shareholder vote.

Board composition

While the constitution provides that the appropriate size for the board is between three and nine members, the board has determined that nine is an appropriate number at this time to ensure appropriate rotation arrangements. At least one-third of all directors stand for election every year although this is often increased due to requirements of the stock exchanges. The directors who retire in each year are those who have been longest in office since their last election or, if there are more than one of equal term, those determined by agreement. Subject to continued shareholder support, the standard term for a non-executive director is six years from the date that he or she initially stands for election. At the end of this term the director will offer his or her resignation. The board may, if it considers it appropriate, offer a further term of up to three years.

The board has constituted a nominations committee, chaired by the chairman of the company and composed of all the non-executive directors. This committee assists in the identification of appropriate directors and, through the committee chair, reviews the performance of existing directors.

Committees

Committees established by the board review and analyse policies and strategies, usually developed by management, which are within their terms of reference. They examine proposals and, where appropriate, make recommendations to the full board. Committees do not take action or make decisions on behalf of the board unless specifically mandated by prior board authority to do so. A committee or an individual director may engage separate independent counsel at the expense of the company in appropriate circumstances, with the approval of the chairman.

The current committees of the board are audit, remuneration and nominations. These meet when necessary and consist entirely of non-executive directors. From time to time, the board may create ad hoc committees to examine specific issues on its behalf.

Board process

Although directors are elected by the shareholders to bring special expertise or perspectives to board deliberations, decisions of the board are made as a group, after taking each perspective into account and the best interests of the company.

The directors receive comprehensive information on the company’s operations before each meeting and have unrestricted access to any other information or records. To assist in ensuring information is timely, focused and concise, board papers are prepared and distributed electronically. Where directors cannot participate in a meeting they forward their views to another director in advance of the meeting. Senior management are also available at each meeting to address queries, and to assist in developing the board’s understanding of the issues facing the company and the performance of its businesses.

Director participation remains very high, with only four apologies for absences from the ten regular meetings during the year. In addition to these meetings were three site visits and a strategic session with senior management. The audit committee met on eight occasions, the nominations committee once and the remuneration committee met five times during the year. Due diligence committee meetings were also convened to review documentation with respect to the company’s capital notes offer and revisions to employee share schemes. Outside the scheduled board meetings were five special meetings.

Back to top3. Promoting ethical and responsible decision-making

The company has written procedures to:

• Clarify the standards of ethical behaviour required of company directors and key executives, and ensure observance of those standards through a code of conduct and the terms of reference for directors and management.
• Prescribe the circumstances where directors and employees can trade in company securities.

The company has a written code of values and a code of conduct with which all employees are required to comply.

The company has a written policy on illegal and unethical conduct. It reinforces this policy with promotional programmes to employees and provides a FairCall confidential telephone hotline to enable reporting of inappropriate behaviour. The FairCall line is operated by an independent party, and the outcome of all matters raised is reported to the audit committee.

New Zealand legislation and the company’s securities trading code of conduct prevent short-term trading and dealing in the company’s securities whilst directors and senior executives are in possession of non-public material and relevant information.

The company reinforces these measures by requiring that any of the 80 persons comprising executives and directors, who are currently designated as having the opportunity to access price-sensitive information, can transact in its securities only with the prior approval of the company secretary.

The company recognises that it has a number of legal and other obligations to non-shareholder stakeholders such as employees, clients, customers and the community as a whole. Its commitment to these obligations is captured in the code of values, and in various policies and procedures for ethical conduct, the responsibilities of employees, conflicts of interest, and relationships with suppliers and customers. These are incorporated into the employment terms of all employees.

Back to top4. Safeguarding the integrity in financial reporting

While the ultimate responsibility to ensure the integrity of the company’s financial reporting rests with the board, the company has in place a structure of review and authorisation designed to ensure truthful and factual presentation of its financial position. This includes:

• An appropriately resourced audit committee operating under a written charter.
• Review and consideration by the audit committee of the accounts and the preliminary releases of results to the market.
• A process to ensure the independence and competence of the company’s external auditors.
• Establishment of an internal audit function in the corporate office, with reporting responsibility to the audit committee.
• Responsibility for appointment of the auditors residing with the audit committee.

Back to top5. Making timely and balanced disclosure

The company has in place procedures designed to ensure compliance with the NZX and ASX Listing Rules such that:

• All investors have equal and timely access to material information concerning the company, including its financial situation, performance, ownership and governance.
• Company announcements are factual and presented in a clear and balanced way.

Accountability for compliance with disclosure obligations is with the company secretary. Significant market announcements, including the preliminary announcement of the half year and full year results, the accounts for those periods and any advice of a change in earnings forecast require prior approval by either the audit committee or the board.

Back to top6. Respecting the rights of shareholders

The company seeks to ensure that its shareholders understand its activities by:

• Communicating effectively with them.
• Giving them ready access to balanced and clear information about the company and corporate proposals.
• Making it easy for them to participate in general meetings.

To assist with this, a company website is maintained with relevant information, including copies of presentations, reports and media releases. The corporate governance procedures are also included on the website. To further assist shareholders the company prepares and distributes its accounts in electronic format to shareholders who have so requested. This annual report is also available in electronic format. The company has continued to provide to all shareholders an annual review which is a summary of the group’s operations and financial performance for the year.

Back to top7. Recognising and managing risk

The company has a formalised system for identifying, overseeing, managing and controlling risk. The processes involved require the maintenance of a risk register that identifies key risks facing the business and the status of initiatives employed to reduce them. The risk register is reviewed regularly, including as part of the internal audit reviews.

During the most recent financial year, management has reported to the board on the effectiveness of the company’s management of its material business risks. As part of that report, appropriate assurances were received from management that the system of risk management and internal control is operating effectively in all material respects in relation to financial reporting risks.

Back to top8. Remunerating fairly and responsibly

The company seeks to ensure that its remuneration policies attract and maintain talented and motivated directors and employees as a way of enhancing the performance of the company.

Non-executive directors’ remuneration

The fees paid to non-executive directors for services in their capacity as directors during the year ended 30 June 2009 are detailed in the table below.

The remuneration policy for non-executive directors does not include participation in either a share or share option plan. Non-executive directors or their associates are nevertheless required to hold at least 20,000 shares in the company.

The company’s policy is to align directors’ remuneration with that for comparably sized Australian companies. Directors’ fees are normally reviewed biennially by the nominations committee unless it is apparent that a significant market movement has occurred.

As part of its biennial review of remuneration in mid 2008, the company commissioned an independent report on directors’ remuneration in Australia, which recommended increases in the base director’s fee and committee fees. The recommendations were implemented for the year ended 30 June 2009 with the base director’s fee becoming $121,000, with committee fees of $23,000, $17,500 and $8,500 per annum for participation on the audit, remuneration and nominations committees respectively. The maximum aggregate fees payable in any year was set at $1,500,000 at the 2006 annual shareholders' meeting. The directors have agreed that there will be no change to the level of directors’ fees for the 2010 year.

Committee chairs receive a 50 percent premium to the committee fee. The board chairman’s fee is determined as three times the base fee paid to directors inclusive of any fees paid to the chairman for participation on board committees. In acknowledgement of the additional time commitment required of any Australian-based director, a travelling allowance of $12,000 per annum is also payable. Where an ad hoc committee is convened, such as for due diligence, additional remuneration may be payable at $1,200 per half day.

The company believes that this provides an appropriate remuneration structure which recognises the increased global focus of the company’s activities and the increased corporate governance obligations imposed on directors.

Executive director’s remuneration

J P Ling was appointed chief executive on 1 September 2006. His annual remuneration comprises base remuneration of $1,260,000 per annum, a short-term incentive, if specified annual performance targets are satisfied, of up to 100 percent of his base remuneration and participation in the company’s long-term incentive scheme. His remuneration for the year ended 30 June 2009 was NZ$1,245,000. As the terms of the short-term incentive scheme requires the company profitability targets to be met, even if the individual performance goals are met, no short-term incentive payment arises this year.

As required by the NZSX and ASX Listing Rules, shareholder approval of the two components of Mr Ling’s long-term incentives was received at the annual shareholders’ meetings on 14 November 2006 and on 12 November 2008. His long-term incentives consist of the grant of 1,000,000 options which was approved by shareholders on 14 November 2006 in accordance with ASX Listing Rule 10.14. In addition, Mr Ling is entitled to shares in the company previously granted pursuant to the Executive Performance Share Scheme and the Executive Long-Term Share Scheme. On 12 November 2008, 88,599 shares in the company were issued to Mr Ling pursuant to the Executive Long-Term Share Scheme.

The grant of 500,000 options was made with effect from 1 September 2006, being the date of Mr Ling’s appointment and a further 500,000 options were granted on 8 September 2009. Each option was granted for no cash consideration, at an exercise price for the initial grant of $9.24, being the volume weighted price of Fletcher Building shares sold on the NZX in the ten business days immediately preceding the announcement of his appointment on 10 May 2006. The exercise price for the second grant is $7.78, being the volume weighted price of Fletcher Building shares sold on the NZX in the ten business days immediately preceding 8 September 2009. The exercise prices are increased annually, with effect from the date of grant, by the company’s cost of capital, less any dividends actually paid. There is a restrictive period of three years from the date of grant during which the options may not be exercised. Subject to the company’s rules on the trading of securities, options may be exercised at any time between the third and sixth anniversary of the date of grant.

The directors are satisfied that they have received independent advice that Mr Ling’s terms of employment provide an appropriate remuneration package for the role of chief executive officer.

As executive director, Mr Ling did not receive any further remuneration in his capacity as a director of Fletcher Building Finance Limited or other subsidiaries.

Directors' and officers’ indemnification and insurance

The company has arranged a programme of directors’ and officers’ liability insurance covering directors, executives and employees in managerial positions acting on behalf of the company. Cover is for damages, judgements, fines, penalties, legal costs awarded and defence costs arising from wrongful acts committed whilst acting for the company.

Actions not covered include dishonest, fraudulent or malicious acts or omissions; wilful breach of a statute, regulation or a duty to the company; improper use of information to the detriment of the company; and breach of professional duty. The insurance cover is supplemented by indemnification by the company, but this does not cover liability for criminal acts.

Senior management remuneration

The company’s remuneration strategy aims to attract, retain and motivate high-calibre employees at all levels of the organisation, and so drive performance and sustained growth in shareholder value. Underpinning this strategy is a philosophy that total remuneration should be provided that is competitive in the markets in which the company operates – particularly for delivering superior performance that contributes to improved business results.

Total remuneration for executives comprises fixed pay, including the value of any benefits, and a short-term variable incentive in the form of an annual performance-related bonus that forms a significant portion of the total package.

All executive performance bonuses require achievement of a mixture of company financial and personal targets.

The company’s remuneration committee is kept fully appraised of relevant market information and best practice, obtaining advice from external advisors when necessary. Remuneration levels are reviewed annually for market competitiveness.

Fixed remuneration

It is the company’s policy to pay fixed remuneration comparable to the median and total compensation comparable to the upper quartile for equivalent roles in the country or region in which the incumbent is located. For the purposes of determining total remuneration within the senior executive group, it is assumed that senior executives will on average achieve 75 percent of their potential short-term incentives over time, such percentages to be reassessed periodically in the light of the actual earnings achieved over the business cycle. It is considered appropriate that 50 percent of long-term variable incentives be achieved over a normal business cycle.

Short-term incentive remuneration

Short-term incentive remuneration is available to recognise the contribution of senior executives to company and individual performance objectives. Short-term incentive remuneration targets are expressed as a percentage of fixed remuneration which is up to 100 percent of the fixed remuneration for the chief executive and the direct reports to the chief executive, and up to 40 percent for all other senior executives.

Participation in the plan is by annual invitation, at which time the target incentive is established. This involves each participant being notified of a financial target and several challenging, measurable personal objectives for the financial year. A variable incentive payment against either target is paid only once the minimum hurdle of the financial target is achieved. That is, even if a participant achieves 100 percent of personal objectives, no variable incentive payment is payable until the minimum financial target is achieved.

The financial measures include the operating earnings target for the applicable division or business unit and the corporate Economic Value Added (EVA) target. Corporate executives are measured on a mix of EVA and personal objectives.

The target for commencement and determination of variable incentive payments is an assessed measure for each business unit or operating division, and is based on the approved budget. In most years the starting point for any variable compensation payments is at 90 percent of target, with 50 percent of the financial component earned at 100 percent of target, and 100 percent of the financial component earned at 105 percent of target.

Individual variable compensation payments are offered entirely at the discretion of the board.

Long-term incentives

The company has implemented long-term cash-based performance incentive schemes, targeted at around 300 executives most able to influence financial results. Where performance targets are met, a cash bonus is payable with the after-tax amount invested in the company’s shares. Participation in any year is by invitation, renewable annually and at the complete discretion of the company.

Where permitted by securities legislation in the relevant jurisdiction, participants purchase shares in the company at the offer price with an interest-free loan. The offer price is established at market value at the time of offer, which will normally be each 30 September. The shares are held by a trustee on behalf of participants until the end of a three-year restrictive period which may be extended for one further year for up to 50 percent of the entitlement. Provided certain performance criteria are met and participants remain employed with the company throughout the restrictive period, legal title in the shares will be transferred to them at the end of the restrictive period.

The schemes are either share-ownership based for New Zealand and Australian executives or are designed to deliver the same economic value as the share scheme and is for a small number of executives in other jurisdictions where offering a share scheme is not optimum.

The share-ownership scheme, the Executive Long-Term Share Scheme (ELSS), which was offered to a small number of executives in 2008, and which will be offered to all eligible executives this year, is described in detail below. This scheme replaces the Executive Performance Share Scheme (EPSS) and is designed to deliver the same economic value as that scheme.

There are some legacy schemes, based on the EPSS, which were offered from 2004 to 2008 and which will terminate over the next three years. Details of those are described in the Corporate Governance section on the company’s website at fletcherbuilding.com.

Executive Long-Term Share Scheme

The ELSS is a cash-based long-term scheme as to the extent any performance target is met the company will pay a cash bonus to facilitate the acquisition of a number of shares in the company.

Under the ELSS, vesting of up to 50 percent of the shares allocated to a participant will be dependent on achieving the Total Shareholder Return (TSR) target and vesting of up to the other 50 percent of the shares will be dependent on achieving the Earnings Per Share (EPS) target. The primary reasons for dual performance measures are:

• As the TSR performance requirement is determined by relative performance against a peer group of Australasian companies it focuses on management rather than general market changes;
• EPS is seen as strongly linked to shareholder wealth, as a consistent growth in earnings should lead to dividend growth;
• Cumulative compound EPS recognises the importance of underlying earnings even in cyclical industries to generate value for investors;
• EPS provides a relevant internal performance measure, operating independently of capital markets;
• TSR and EPS were the most widely used combination of performance measures based on external benchmarking data.

The main terms of the ELSS, are as follows:

(a) The ELSS enables participants to purchase shares in the company at market value with the assistance of an interest-free loan. Vesting of the shares in the participants is subject to their continued employment and the achievement of the performance objectives.

Vesting of 50 percent of the shares in the participants requires achievement of certain levels of TSR relative to a comparator group of New Zealand and Australian companies over a minimum three-year restrictive period, or as may be extended by the one-year retesting period.

Vesting of the remaining 50 percent of the shares in the participants requires achievement of certain EPS targets over a three-year restrictive period. Each year, the board will, in its discretion, set an EPS target for the group. EPS is measured by the Fletcher Building group’s net earnings attributable to shareholders for financial reporting purposes, divided by the weighted average number of shares on issue. The one-year retesting period will not apply to the EPS tranche of shares.

(b) If at the end of the minimum three-year restrictive period the TSR performance target has not been met in full, the restrictive period will be extended (either automatically or at the election of the participant, depending on the target level achieved) for a further one-year period. If a retesting period applies, it will apply in relation to all the participant’s shares in the TSR tranche. During this one-year retesting period, the company will assess (midway through the period and at the end of the retesting period) whether the TSR performance objective has been achieved. If the TSR performance declines during the retesting period, the participant’s entitlements (if any) will be determined on this lower TSR performance result.

(c) The value of a participant’s entitlement and the number of shares to be acquired is determined annually on 1 October.

(d) At the expiry of the minimum three-year restrictive period, and, if applicable, on the testing dates during the retesting period, transfer of legal title to some or all shares in the TSR tranche may occur. The extent to which shares are transferred is determined by a sliding scale, with 50 percent of shares vesting if the 51st percentile of the TSR performance of the comparator group is met and 100 percent of shares vesting if the 75th percentile of the TSR performance is met.

(e) At the expiry of the three-year restrictive period, transfer of legal title to some or all shares in the EPS tranche (i.e. 50 percent of shares allocated to a participant) may occur. Each year, the board will, in its discretion, set the vesting scale for the EPS tranche offered that year (including the minimum and maximum vesting thresholds) having regard to current circumstances.

(f) To the extent that either the EPS or TSR performance objectives are met and any conditions on the transfer of shares are satisfied (including continued employment), legal title to the relevant number of Fletcher Building shares will be transferred to the participant and a bonus paid to the participant such that the after-tax amount of that bonus will equal, or exceed, the outstanding balance of the loan in respect of the shares transferred, taking into account any dividends which have been paid by the company during the restrictive period including any retesting period.

(g) The restrictive period may terminate early in certain defined circumstances. These include a participant ceasing employment with the Fletcher Building group for a qualifying reason (for example, due to redundancy or sickness), a takeover offer being made for the company or if the company is a party to a Court-approved reorganisation, merger or reconstruction. If such an event occurs, a determination will be made of the extent to which the EPS and TSR performance objectives have been met at the relevant date and the extent to which legal title to the shares will pass to the participant. The bonus entitlements noted in (f) still apply to the shares transferring.

(h) To the extent that the EPS or TSR performance objectives are not met at the end of the applicable restrictive period, or if a participant ceases to be employed by the Fletcher Building group other than for a qualifying reason, some or all of the shares will be forfeited to the trustee without compensation unless the trustee in its discretion determines otherwise.

(i) During the restrictive period (including any retesting period) the shares are held by a trustee and may not be sold or used as security for another loan. Participants can direct the trustee how to vote on the shares. Participants are also entitled to the benefits of any dividends, capital returns or other distributions declared by Fletcher Building and to the benefit of any rights issues, bonus issues or other entitlements offered to shareholders. After any adjustment for additional taxation on any such distributions and entitlements, the after-tax value will be withheld by the trustee and applied in part repayment of the loan provided to acquire shares.

In circumstances where shares cannot be acquired under the applicable securities legislation, equivalent economic entitlements are conveyed by way of cash bonus entitlements.

On 30 September 2009 the three-year restrictive period in respect of the third issue under the EPSS ends. Present indications are that the TSR of the company for the period will be just over the 74th percentile of the comparator group of companies and accordingly participating executives will be entitled to take up full ownership of around 333,000 Fletcher Building shares.

Superannuation

Participation in defined benefit and defined contribution retirement savings plans is made available to executives as required by remuneration practices in relevant jurisdictions. For those participating, an amount to recognise the value of the employer contributions required is included in the remuneration information in the Regulatory Disclosures section of this report.

Holding the company’s securities

A standard term in the senior executive employment contract is a requirement that, over time, senior executives must acquire and maintain a holding in the company’s ordinary shares until such time as the sum so invested, or the market value of their shareholding, exceeds 50 percent of their fixed remuneration. In meeting this obligation executives are required, from the date of receipt of the first payment under the senior executive short-term variable incentive plan, to apply at least half of the after-tax proceeds so earned in acquiring shares.

The company believes this shareholding strengthens the alignment of senior executives with the interests of shareholders and puts their own remuneration at risk to long-term company performance. Apart from the long-term cash-based performance incentive schemes outlined above where an agreed percentage of any cash received is to be invested in purchasing shares, executives are left to their own discretion to organise acquiring the shares within the normal insider trading rules, and no allowance is made for the restriction on trading those shares. Directors may, in any year at their discretion, ease the share investment percentage required in terms of this policy in respect of any incentive payment arising in that year.

Shares issued to executives under the long-term incentive scheme, but still subject to the restrictive period, do not count towards the required minimum shareholding obligation.

The company does, however, allow New Zealand-based executives to meet their requirement to hold the company’s shares by having an economic exposure to the shares through a defined contribution investment account in the Fletcher Building Retirement Plan, the value of which is calculated by reference to the Fletcher Building share price.

Disclosure policy

The New Zealand Companies Act 1993 requires the disclosure of all remuneration payable over $100,000 per annum in $10,000 bands. As the company must comply with this obligation, it has chosen not to also make detailed disclosure of the remuneration of the five highest paid executives as is considered best practice under the ASX Corporate Governance Guidelines.

Compliance with ASX corporate governance guidelines

The company meets all the best practice requirements of the ASX Corporate Governance Council other than making detailed disclosure of the five highest executives’ remuneration. As is noted above, the company makes the remuneration disclosures required of a New Zealand company under the Companies Act 1993.