COVER STORY: Where the Long White Cloud Meets the Maple Leaf Governance in New Zealand and Canada

Now in its fourth year, the annual “Directions – Understanding Governance” survey shows solid trends in governance development in New Zealand. Looking also at the same survey data from Canada, to pick country similar in its corporate and legal structures, we see lot of similarity in the approach to governance, the needs of firms and how shareholders, managers and directors plan their way forward.
Sponsored by universities in both countries, as well as several large organisations with an interest in governance in New Zealand, such as PWC, ANZ/National, Simpson Grierson, Swann Group, 3media Group, and several government agencies, this survey reaches deep into the fabric of corporate entities in both countries, with about 60 percent of responses in both countries from privately held and family-owned firms. This means large number of the responses are from the firms that make up the bulk of GDP in both countries and thus report from deep inside the engine room of economies in New Zealand and Canada. The survey operated over 120 days and captures the downtrends in world economic activity and how it affects the top-level management of firms. With more than 5000 responses in New Zealand over the past three years, this is the largest non-governmental governance survey in this country.
While 73 percent of firms in both countries report strong in-country competition, Canadian firms report 50 percent greater concern over strong international competition than their New Zealand counterparts. This likely means that firms in Canada, operating in close proximity to their rivals in the United States, see stronger head-to-head competition in their main overseas market.
We are encouraged by the level of similarity in key governance areas between firms in both countries, showing that New Zealand firms are performing quite similarly to firms in Canada. About 45 percent of directors in firms are independent directors (this number has steadily increased in New Zealand over the past few years), in less than 60 percent of the firms the CEO is also director, and in about 70 percent of all new director appointments, those new directors were sourced from management or existing directors.
We see that New Zealand shareholders and directors face similar issues to their Canadian colleagues: How to increase the number of independent directors and where to source those candidates. While New Zealand has director/firm matching websites, such as www.finddirectors.com Canadian shareholders and directors are left with recruiting exclusively through their network of friends, with fewer than seven percent of past director appointments having involved professional search firm. This identifies practical limitation of where to find directors once firm has decided to add independent directors. Clearly, finding candidates from the limited circle of friends would exclude suitable directors who might live one valley away and few minutes drive over the hills.
Once an opening exists on board, what makes Canadian or Kiwi business person consider an appointment as company director? In both countries the main driver is the ability to “do some good”, with more than 70 percent of respondents ranking this feature as “very important”. The “reputation of other directors” follows in importance in both countries, and while New Zealand director candidates are also concerned about their “personal level of risk” (66 percent), that issue is much less relevant in Canada (46 percent), where the directors are better protected from personal liability arising from directorships.
As in prior years, and supported by the data from Canada, directors report their competence levels highest for “commitment” (about 50 percent in both countries), while they report significantly lower levels of “excellent competence” in other areas:
• corporate strategy 11 percent New Zealand/23 percent Canada;
• corporate governance 19 percent/26 percent;
• leadership 17 percent/19 percent;
• sustainability 35 percent/38 percent;
• team player 22 percent/15 percent and
• ability to manage dissent 15 percent/15 percent.
What does this mean for companies and for directors? Commitment to do an excellent job is not good enough if the tool box doesn’t hold enough skills to handle the tasks ahead. Sitting directors in firms will need booster shot of education to upgrade their skills and new directors should consider beefing up theirs in the key competence areas that matter for directors. Given the increased demand on directors’ supervision of management and the more complex environment for global strategic planning, it doesn’t take genius to conclude that it makes little sense to add directors to the board when they cannot contribute effectively in key areas.
“In New Zealand, with its many small-/mid-size firms, many of which are family-owned and operated, it is significant step to move towards solid governance structure with formal board. I have seen many local firms thrive after they bring in external directors to contribute their expertise and assist with long-term strategic planning,” says Don Jaine, managing director, Swann Group.
Not surprisingly, sitting directors and senior managers are not yet ‘sold’ on the contribution of independent directors to their boards. Few respondents rank independent directors “outstanding” in their contribution, but in the “very good” contribution category, Canadians generally rank their independent director contribution similarly to New Zealanders. In some areas Canadian independent directors contribute better: The “contribution to company performance” is ranked “outstanding/very good” at 87 percent in Canada and only at 72 percent in New Zealand, in “understanding governance issues” 75 percent/66 percent and in “board meeting contribution” 88 percent/71 percent. In some others, New Zealand directors and Canadian directors contribute similarly:
• networking assistance 63 percent/61 percent;
• providing strategic vision 69 percent/67 percent; and
• understanding the business 69 percent/64 percent.
Only in one area have New Zealand independent directors slight lead over their Canadian colleagues: “creating sustainable enterprise” 54 percent New Zealand/46 percent Canada.
We conclude that the skill level of independent directors in New Zealand must rise in order to reach global level of competitiveness. None of the areas in which New Zealand independent directors seem to lag behind are too complex to be fixed through focused training. The three and half day Qualified Director seminar is one example where PWC and Simpson Grierson partners, New Zealand executives, serving directors such as Jim Delegat and Bill Falconer, policy makers from CCMAU and the Human Rights Commission, and others discuss director skills and train in practically relevant format.
New Zealand directors seem to understand better than their Canadian colleagues the distinction between board responsibilities and operating management’s duties. Only 12 percent of New Zealand directors believe they should spend more time in helping the CEO and management operate the firm, while 22 percent of Canadian directors believe that area needs more of their time.
Only 14 percent of Canadian directors want to devote more time to risk management, while 53 percent of New Zealand directors believe this area needs more effort, and we believe that risk management in general has been an under-managed area in New Zealand firms for long time. Good risk management requires the skills to perform solid internal and external analysis, objectively assessing strengths, weaknesses, opportunities and threats and then reviewing the firm’s position in the context of its global rivalry position. This is not something you do just by falling off the turnip truck in the morning, but requires systematic approach, consultative engagement of the stakeholders and the willingness to challeng